Recently I turned 40 and so I went today for a check up just make sure everything is OK (it is). I think there is an analogy here for managing your portfolio.
There is not much that is pleasant about getting poked and prodded but it is what you do so that small problems, if there are any, don't become big problems a little later.
A small problem in your portfolio might be having too much of one thing and not enough of another. Over the last month I have heard from a lot of people with too much in emerging markets, that's been one problem (large or small depends on how much you have) and although it has not come up a lot in the comments perhaps people have too little exposure to consumer stocks.
As the S&P 500 has fallen close to 4% this month consumer stocks have only fallen 2% (as measured by IYK and IYC). This is important. If you had little or no consumer
exposure this past month and too much in emerging markets you are probably down a lot more than 4%.
Not everything in a portfolio will work or be interesting for a given period of time. One idea that I have written about before is not knowing where leadership might come from. You can think it will be tech, for example, but the consequence of being wrong depends on how much you tilt your portfolio toward your expectations.
The typical investor (as differentiated from a trader) does not need to hit a home run every quarter. An occasional checkup of sorts to make sure you have not made a bigger bet that you realize is a good idea but I know from comments and emails that not enough people do this.
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Wikinvest Wire
Wednesday, May 31, 2006
Barron's Gets Into Blogging
Barron's is rolling out the blogs. For months Barron's Electronic Investor column has helped create awareness of the blogosphere. This site was first profiled in December 2004.
Now Barron's is trying its own hand and you do not need to be a subscriber. There will three in all (for now). The first one up and running is the Tech Trader blog written by Eric Savitz. There is also a daily version of Up and Down Wall Street but it is not formatted as a blog with the ability to leave comments. At some point in the near future, Kopin Tan will have a blog about the options market.
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Now Barron's is trying its own hand and you do not need to be a subscriber. There will three in all (for now). The first one up and running is the Tech Trader blog written by Eric Savitz. There is also a daily version of Up and Down Wall Street but it is not formatted as a blog with the ability to leave comments. At some point in the near future, Kopin Tan will have a blog about the options market.
Read more!
More Emerging Market
Yesterday as I was reading an article by Tim Middleton about selling out of emerging markets I had the following question hit my in box.
what do you think about this increasing emerging markets nervousness? Do you think money flow might come back to the US as a flight to safety (or maybe lately I've been thinking to Europe due to the strengthening euro)? I think maybe the the bear market does not really start until money flow to the US is at a high (like in 2000).
As I read Tim's article he clearly thinks more downside is ahead, based on past declines, and he is on board with selling now but I am not sure if he explicitly thinks investors should sell to zero weight. To be clear I do not advocate zero exposure.
I wrote several times before the month long slide about the potential for emerging markets to correct at some point. I was not making a prediction so much as pointing out that hot asset classes usually correct in one way or another. In these posts I noted that markets are attractive investment destinations for different reasons. Brazil and Chile have resources that the world needs. The pricing of their resources may fluctuate but in the big picture, global demand is increasing in China and India (soon Vietnam and Pakistan) and there is not much correlation to the western economic cycle.
Places like Singapore and Malaysia manufacture and export electronics and other things so they are more dependent on western demand and more susceptible western economic cycles.
Turkey, Hungary and Vietnam are really living in their own world so to speak. They each have internal catalysts that will either pan out or not (my take is that they will pan out even if it takes a while).
The current move is a panic of some sort. Obviously at some point in the rally in emerging market equities speculative and unsophisticated money moved in and now some (maybe all?) has moved out.
Between the comments left here and email I received at my Street.com account many people had way too much exposure in emerging market equities. I targeted 7% as the right weight for me, my exposure grew to be more than that and I cut back having no great inkling there would be a decline like this. Many people had 20% or more in emerging which, in terms of strategy, seems to be a repeat of mistakes made by owning too much tech in 2000, of course the consequences so far are much less severe.
To the readers question, will money flow back into the US and Western Europe? The short answer is yes but the longer answer is that it won't be enough, by itself, to create upward pressure on developed market equities. The dollar volume sold of the emerging market stocks is too small to have a lasting effect.
There have been comments before asking whether or not sell. My opinion is always the same, sell if you think you have too much. Having zero is a very specific bet, one that I am not willing to make with other peoples' money.
Read more!
what do you think about this increasing emerging markets nervousness? Do you think money flow might come back to the US as a flight to safety (or maybe lately I've been thinking to Europe due to the strengthening euro)? I think maybe the the bear market does not really start until money flow to the US is at a high (like in 2000).
As I read Tim's article he clearly thinks more downside is ahead, based on past declines, and he is on board with selling now but I am not sure if he explicitly thinks investors should sell to zero weight. To be clear I do not advocate zero exposure.
I wrote several times before the month long slide about the potential for emerging markets to correct at some point. I was not making a prediction so much as pointing out that hot asset classes usually correct in one way or another. In these posts I noted that markets are attractive investment destinations for different reasons. Brazil and Chile have resources that the world needs. The pricing of their resources may fluctuate but in the big picture, global demand is increasing in China and India (soon Vietnam and Pakistan) and there is not much correlation to the western economic cycle.
Places like Singapore and Malaysia manufacture and export electronics and other things so they are more dependent on western demand and more susceptible western economic cycles.
Turkey, Hungary and Vietnam are really living in their own world so to speak. They each have internal catalysts that will either pan out or not (my take is that they will pan out even if it takes a while).
The current move is a panic of some sort. Obviously at some point in the rally in emerging market equities speculative and unsophisticated money moved in and now some (maybe all?) has moved out.
Between the comments left here and email I received at my Street.com account many people had way too much exposure in emerging market equities. I targeted 7% as the right weight for me, my exposure grew to be more than that and I cut back having no great inkling there would be a decline like this. Many people had 20% or more in emerging which, in terms of strategy, seems to be a repeat of mistakes made by owning too much tech in 2000, of course the consequences so far are much less severe.
To the readers question, will money flow back into the US and Western Europe? The short answer is yes but the longer answer is that it won't be enough, by itself, to create upward pressure on developed market equities. The dollar volume sold of the emerging market stocks is too small to have a lasting effect.
There have been comments before asking whether or not sell. My opinion is always the same, sell if you think you have too much. Having zero is a very specific bet, one that I am not willing to make with other peoples' money.
Read more!
Tuesday, May 30, 2006
Will Cheap Stocks Get Cheaper?
The Big Picture: Will Cheap Stocks Get Cheaper?
This is a great read over on Barry's site. It is a thorough exploration of the bearish case for equities. It does not have to be correct but it should get you thinking.
Read more!
This is a great read over on Barry's site. It is a thorough exploration of the bearish case for equities. It does not have to be correct but it should get you thinking.
Read more!
Predictable?
The decline today seems kind of predictable. Well, I did not predict it but a lot of folks did call for some snap back, which came last week, followed by more selling. Today we have more selling.
While I would not want to have zero exposure to equities I do think the returns we will see will seem disappointing. My prediction for year end of 1180 to 1219 for the S&P 500 still feels right to me which would not be the end of the world. The volatility of the last few weeks, despite still not being that high, will probably lessen in the next few weeks.
I discount the probability of a 20% decline in very short order (be it one day like 1987 or a few weeks like 1998). So many of today's investors have lived through those other declines and I think are very worried about something similar coming now that I just think it is unlikely (gut call here with no science).
A milder decline is more conducive to a bear market, which is also not the end of the world but is a part of the normal stock market cycle. If this plays out you will have time to reduce exposure, if it is incorrect and the market goes up a lot you can capture most of that move provided you do not try to outsmart the market. So far my only sales have been of holdings that grew too large. I have more cash raised but am not positioned in such a way that I will be completely left behind in the face of a massive rally.
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While I would not want to have zero exposure to equities I do think the returns we will see will seem disappointing. My prediction for year end of 1180 to 1219 for the S&P 500 still feels right to me which would not be the end of the world. The volatility of the last few weeks, despite still not being that high, will probably lessen in the next few weeks.
I discount the probability of a 20% decline in very short order (be it one day like 1987 or a few weeks like 1998). So many of today's investors have lived through those other declines and I think are very worried about something similar coming now that I just think it is unlikely (gut call here with no science).
A milder decline is more conducive to a bear market, which is also not the end of the world but is a part of the normal stock market cycle. If this plays out you will have time to reduce exposure, if it is incorrect and the market goes up a lot you can capture most of that move provided you do not try to outsmart the market. So far my only sales have been of holdings that grew too large. I have more cash raised but am not positioned in such a way that I will be completely left behind in the face of a massive rally.
Read more!
Finally, A Wall Street Guy
One of my big criticisms of President Bush has been his reluctance to appoint people with Wall St. experience to the various financial and economic posts in his administration. Throughout his presidency it seems like Bush has made things more difficult for himself at almost every turn. It has always seemed like the treasury and economic guys have not been completely in the loop on all the decisions being made (this is just my perception and not meant to be taken as fact).
The consensus of what I have read and heard infers that Paulson will be more of a strong dollar guy than a smoke stack CEO or someone like Donald Evans would be. So the question becomes can Paulson make enough of an impact in the next two and half years to help make improvements where they are needed. I don't think the problems faced by the US economy are solvable in that time but improvements can happen.
I do think that Paulson is making a huge financial sacrifice and that should be commended. Hopefully this works out.
Read more!
The consensus of what I have read and heard infers that Paulson will be more of a strong dollar guy than a smoke stack CEO or someone like Donald Evans would be. So the question becomes can Paulson make enough of an impact in the next two and half years to help make improvements where they are needed. I don't think the problems faced by the US economy are solvable in that time but improvements can happen.
I do think that Paulson is making a huge financial sacrifice and that should be commended. Hopefully this works out.
Read more!
Monday, May 29, 2006
Can Gold Go To $8000?
James Turk says yes in this week's Barron's Interview.
I'll preface this post by saying that I view the scenario of $8000 (or any number close to that) as being very unlikely. Some of the things that concern Mr. Turk concern me as well (things I have been writing about for a long time here) but the magnitude of the consequence does not seem to be correct to me.
As I read the interview Mr. Turk is concerned about increasing supply of dollars at a time of decreasing demand. This is troublesome. There has been visibility (to my way of thinking) for the dollar's role as world reserve currency to change. I think the dollar will share that role, perhaps with the euro.
Another concern is the message sent by denying foreign purchases of Unocal and the ports. He views that as protectionism. "Immediately after his comments about this he is asked for his target for gold and says "It is going much higher, and the $8,000 [per ounce] I mentioned a couple of years ago is probably as good a target as any."
He then says that gold could hit $2000 in the next six to twelve months. There was no real process shared for how her gets to either number, perhaps this is available on his web site, I did not check.
Since I don't find it plausible that we will see $2000 in his time period or $8000 in the next couple of decades it is worth understanding what the fallout could be if his predictions are correct. Gold tripling in a year, I would think, could only come about from sort of calamitous external shock, the likes of which we have never seen. While I concede all of the structural concerns that could weaken the dollar (actually I have client portfolios tilted to this belief) and push gold higher, this feels more like a big tanker turning instead of a little speed boat (that is someone else's analogy). I don't believe the deficit threats, as we know them now, can possibly cause the dollar to weaken so much that gold triples in a year.
It is in no one's interest for the dollar to get so weak that gold sky rockets in this manner. We account for something like 25% of the world's economy. I believe the start of a massive dollar decline would cause a large scale intervention by every economy on the planet to stem the decline. To be clear I am talking in the face of a massive decline not a 10-15% decline.
If $2000 gold does start to play out, it would probably make sense to buy more and more gold (and other commodities) on the way up, possibly not own any equities from any country and buy foreign currencies.
You can decide for yourself on this. In the past there have been comments left proclaiming fast swift moves up in gold and down in the dollar, in line with Mr. Turk's view and there will probably be more but his timeline is tough to see.
Read more!
I'll preface this post by saying that I view the scenario of $8000 (or any number close to that) as being very unlikely. Some of the things that concern Mr. Turk concern me as well (things I have been writing about for a long time here) but the magnitude of the consequence does not seem to be correct to me.
As I read the interview Mr. Turk is concerned about increasing supply of dollars at a time of decreasing demand. This is troublesome. There has been visibility (to my way of thinking) for the dollar's role as world reserve currency to change. I think the dollar will share that role, perhaps with the euro.
Another concern is the message sent by denying foreign purchases of Unocal and the ports. He views that as protectionism. "Immediately after his comments about this he is asked for his target for gold and says "It is going much higher, and the $8,000 [per ounce] I mentioned a couple of years ago is probably as good a target as any."
He then says that gold could hit $2000 in the next six to twelve months. There was no real process shared for how her gets to either number, perhaps this is available on his web site, I did not check.
Since I don't find it plausible that we will see $2000 in his time period or $8000 in the next couple of decades it is worth understanding what the fallout could be if his predictions are correct. Gold tripling in a year, I would think, could only come about from sort of calamitous external shock, the likes of which we have never seen. While I concede all of the structural concerns that could weaken the dollar (actually I have client portfolios tilted to this belief) and push gold higher, this feels more like a big tanker turning instead of a little speed boat (that is someone else's analogy). I don't believe the deficit threats, as we know them now, can possibly cause the dollar to weaken so much that gold triples in a year.
It is in no one's interest for the dollar to get so weak that gold sky rockets in this manner. We account for something like 25% of the world's economy. I believe the start of a massive dollar decline would cause a large scale intervention by every economy on the planet to stem the decline. To be clear I am talking in the face of a massive decline not a 10-15% decline.
If $2000 gold does start to play out, it would probably make sense to buy more and more gold (and other commodities) on the way up, possibly not own any equities from any country and buy foreign currencies.
You can decide for yourself on this. In the past there have been comments left proclaiming fast swift moves up in gold and down in the dollar, in line with Mr. Turk's view and there will probably be more but his timeline is tough to see.
Read more!
Saturday, May 27, 2006
The Big Picture For The Week Of May 28, 2006
There were two interesting articles in the current BusinessWeek. The first article (sub req'd) was about CalPERS' coming rotation into commodities. According to the article the fund has no commodity exposure and the expectation is that CalPERS will put up to 10% of the fund into commodities.
The article includes a little where have they been criticism which is fair but the lead manager seemed unfazed. My take on this is that he is looking at commodities as an asset class with some long term merits in terms of portfolio diversification and some long term demographic demand catalysts that may exist. Regardless of where any of the commodities have come from, price-wise, the forward looking potential is either compelling to you or it is not. For example if you are part of the small crowd that sees $2000 (or higher per this week's Barron's interview) gold coming soon it would be foolish to be worried that the next $100 could be down.
I buy into the demand for commodities and the potential portfolio benefits but I keep less than the 10% that CalPERS is considering. How much to own is clearly a subjective thing but owning some, even after the nice move of the last couple of years, is important.
Especially when you consider the possible underperformance that Jeremy Siegel sees coming for domestic equities written about in the other BusinessWeek article that caught my eye. The general concern is that as baby boomers start to cash out of equities to fund retirement there will not be enough demand from within the US to absorb the supply that is sold. Dr. Siegel believes that the best hope for this problem is the burgeoning middle class that is coming up in places like China and India. These people would have enough demand for the supply he sees coming.
There are two arguments made in the article to contradict Siegel's point. Robin Brooks from the IMF says that 90% of the stocks are held by the wealthiest 10% and those folks can afford not to sell. This would seem to me to be factually incorrect. It ignores the 401Ks and pensions.
The other point made is that people are working and living longer so there will be less need to sell equities. This makes sense to me but is also incomplete. A 60 year old, today, has a very high likelihood of living past 90. And when they do hit 90 where will medical technology be then? This is the line of thought taken in the Barron's cover story a couple of months ago. Today's 60 year old needs equities, more than their parents did, for the long term.
I think a bigger financial crisis could arise from too many investors getting bad advice about keeping too much in bonds. Bonds don't grow. Someone with too much in bonds faces the potential of running out of money as a function of being too conservative.
Read more!
The article includes a little where have they been criticism which is fair but the lead manager seemed unfazed. My take on this is that he is looking at commodities as an asset class with some long term merits in terms of portfolio diversification and some long term demographic demand catalysts that may exist. Regardless of where any of the commodities have come from, price-wise, the forward looking potential is either compelling to you or it is not. For example if you are part of the small crowd that sees $2000 (or higher per this week's Barron's interview) gold coming soon it would be foolish to be worried that the next $100 could be down.
I buy into the demand for commodities and the potential portfolio benefits but I keep less than the 10% that CalPERS is considering. How much to own is clearly a subjective thing but owning some, even after the nice move of the last couple of years, is important.
Especially when you consider the possible underperformance that Jeremy Siegel sees coming for domestic equities written about in the other BusinessWeek article that caught my eye. The general concern is that as baby boomers start to cash out of equities to fund retirement there will not be enough demand from within the US to absorb the supply that is sold. Dr. Siegel believes that the best hope for this problem is the burgeoning middle class that is coming up in places like China and India. These people would have enough demand for the supply he sees coming.
There are two arguments made in the article to contradict Siegel's point. Robin Brooks from the IMF says that 90% of the stocks are held by the wealthiest 10% and those folks can afford not to sell. This would seem to me to be factually incorrect. It ignores the 401Ks and pensions.
The other point made is that people are working and living longer so there will be less need to sell equities. This makes sense to me but is also incomplete. A 60 year old, today, has a very high likelihood of living past 90. And when they do hit 90 where will medical technology be then? This is the line of thought taken in the Barron's cover story a couple of months ago. Today's 60 year old needs equities, more than their parents did, for the long term.
I think a bigger financial crisis could arise from too many investors getting bad advice about keeping too much in bonds. Bonds don't grow. Someone with too much in bonds faces the potential of running out of money as a function of being too conservative.
Read more!
Friday, May 26, 2006
Commodity ETF Issues
There is an interesting article up at ETFzone.com about demand for the GLD ETF moving the price of the commodity (tail wagging the dog so to speak). For evidence, the article cites that demand for things like jewelry and industrial use is down but the price is up a lot. The assertion made could be correct but my initial reaction is to disagree. I do believe investor demand has been a catalyst to lift the price but the total assets in the two ETFs add up to about $8 billion. For the analysis to be complete we would need to know what the growth in open interest for gold commodity contracts has been. I imagine the leverage offered in that market has caused more growth in futures than in ETFs. If anyone has this info please leave a comment.
I would think the Silver ETF would be more likely to be the tail that wags the dog. The Silver Axis site explains this much better than I could. The short and dirty is that the silver market has different dynamics because much of it gets destroyed as it is consumed.
A reader left a comment about the "tracking" problem that USO has in staying with the price of crude. The earlier Brent Oil Security (OILB.L) has a similar issue, in that the actual price of Brent is different than the price of the fund.
The issue boils down to whether you as an investor can live with the flaws. Jimmy Rogers made an interesting comment the other day on Fox about oil stocks vs. oil the commodity. Some of the integrated oil companies will face problems with declining reserves in the coming years. Some of these companies share prices will suffer as a result. He said own oil not the companies. Certainly the logic makes sense. This means that if oil stocks stop being good proxies for oil we will face having to pick from something like USO or a commodity contract. Chances are I would go with USO but fortunately no one needs to decide this today.
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I would think the Silver ETF would be more likely to be the tail that wags the dog. The Silver Axis site explains this much better than I could. The short and dirty is that the silver market has different dynamics because much of it gets destroyed as it is consumed.
A reader left a comment about the "tracking" problem that USO has in staying with the price of crude. The earlier Brent Oil Security (OILB.L) has a similar issue, in that the actual price of Brent is different than the price of the fund.
The issue boils down to whether you as an investor can live with the flaws. Jimmy Rogers made an interesting comment the other day on Fox about oil stocks vs. oil the commodity. Some of the integrated oil companies will face problems with declining reserves in the coming years. Some of these companies share prices will suffer as a result. He said own oil not the companies. Certainly the logic makes sense. This means that if oil stocks stop being good proxies for oil we will face having to pick from something like USO or a commodity contract. Chances are I would go with USO but fortunately no one needs to decide this today.
Read more!
Inverse ETFs
The first inverse index ETFs have been approved to trade by the SEC. They will be listed by Profunds. Actually there have been inverse ETFs trading in Europe for a short while (hat tip to long time reader Londoner).
Naturally since there is something new coming, Dan Culloton is quoted with a negative opinion. That same article also noted the following.
Take the Nasdaq 100 between June 11, 2002, and March 17, 2003, a time that covered the end of the bear market and the first part of a rally. During that time, the Nasdaq 100 lost 2.19%. So if you were in UltraBear Profund (Nasdaq:URPIX - News), a traditional mutual fund that tracks the inverse of the Nasdaq 100 by 200%, you might have expected to be up 4.38%. But no, you actually would have lost 33.22%, thanks to the strange arithmetic of leverage.
OK, well URPIX is leveraged to capture twice the inverse of the S&P 500 not the Nasdaq.
While expenses prevent it from capturing exactly double, the fund appears to be generally doing its job shorter term. Over the last 12 months URPIX is down 10% while the SPX is up 5%.
The general idea of this type of product is to make short-term bets on the market. To have a shot of success the fund needs to do what it is supposed to do and I would say that URPIX fits the bill for short periods of time. Longer term though the SPX is flat and URPIX is down 25% which seems odd.
I called the fund to try to get an explanation. The goal is to double the inverse. Over periods of time there can be a compounding effect that causes the fund to deviate from the goal. Also periods of extreme volatility (like the time period chosen by the author) increase the possibility of the fund's tracking error growing.
I did not try to pin this person down on whether the ETFs might have the same issues or not. This leaves us with a type of product that has flaws (like all products). Londoner asked if I would use the inverse ETFs. The short answer is probably. They provide a way to tactically reduce net long exposure for brief periods of time. I do plan to study them further once they start trading.
Read more!
Naturally since there is something new coming, Dan Culloton is quoted with a negative opinion. That same article also noted the following.
Take the Nasdaq 100 between June 11, 2002, and March 17, 2003, a time that covered the end of the bear market and the first part of a rally. During that time, the Nasdaq 100 lost 2.19%. So if you were in UltraBear Profund (Nasdaq:URPIX - News), a traditional mutual fund that tracks the inverse of the Nasdaq 100 by 200%, you might have expected to be up 4.38%. But no, you actually would have lost 33.22%, thanks to the strange arithmetic of leverage.
OK, well URPIX is leveraged to capture twice the inverse of the S&P 500 not the Nasdaq.
While expenses prevent it from capturing exactly double, the fund appears to be generally doing its job shorter term. Over the last 12 months URPIX is down 10% while the SPX is up 5%.
The general idea of this type of product is to make short-term bets on the market. To have a shot of success the fund needs to do what it is supposed to do and I would say that URPIX fits the bill for short periods of time. Longer term though the SPX is flat and URPIX is down 25% which seems odd.
I called the fund to try to get an explanation. The goal is to double the inverse. Over periods of time there can be a compounding effect that causes the fund to deviate from the goal. Also periods of extreme volatility (like the time period chosen by the author) increase the possibility of the fund's tracking error growing.
I did not try to pin this person down on whether the ETFs might have the same issues or not. This leaves us with a type of product that has flaws (like all products). Londoner asked if I would use the inverse ETFs. The short answer is probably. They provide a way to tactically reduce net long exposure for brief periods of time. I do plan to study them further once they start trading.
Read more!
Thursday, May 25, 2006
Good EM Chatter
In and amongst the spam there have been some great comments about emerging markets. Long time reader Jey points out that volatility goes with the territory (which is 100% correct) another reader cautions that the market is warning to get out and come back later (could turn out to be correct) and I tried to offer something constructive to our friend with the questions on Russia.
One problem with trying to say now is the time to buy or time to sell is that different investors have done different things to this point. If this downturn has taught you that you own too much buying more here hardly seems right. I think that if you think you own too much of something you should reduce. If you have never owned emerging markets before, they are now 15%-20% cheaper and there is no question that a diversified portfolio needs some exposure.
People that bought heavy one month ago have a different mind set now than people who sold a month ago.
Jey's comment reiterates something I have been saying from the start, emerging markets are volatile and will always be volatile. No doubt people thought they could handle it when all the volatility was up.
A stock I own for clients, CVRD (RIO) is down a lot from its high. This is a name I have owned for a long time for some clients and one of the ones I reduced in late April. Brazil has been pounded in this but CVRD has good news, they successfully negotiated 19% price increases with China. Maybe that is not so good, last year's increase was about 70%.
Here is the thing with Brazil. They have stuff the world needs. Regardless of the volatility in stock prices, currencies or commodity prices, they still have the resources. The same is true for Russia.
My view is that a 2% weight in a stock form one of these places can help overall returns. If you have three or four stocks totaling 6%-8% that all go down by a third, the result might be that you lag for a little while, not so bad. When you get into the 20%-30% range the consequences become more severe.
Emerging markets are just an asset class. They were one if the hot ones but too much of anything is a bad idea and that is coming home to roost for some folks now.
That this part of the market is now down does not change the role that emerging markets play in a diversified portfolio.
Read more!
One problem with trying to say now is the time to buy or time to sell is that different investors have done different things to this point. If this downturn has taught you that you own too much buying more here hardly seems right. I think that if you think you own too much of something you should reduce. If you have never owned emerging markets before, they are now 15%-20% cheaper and there is no question that a diversified portfolio needs some exposure.
People that bought heavy one month ago have a different mind set now than people who sold a month ago.
Jey's comment reiterates something I have been saying from the start, emerging markets are volatile and will always be volatile. No doubt people thought they could handle it when all the volatility was up.
A stock I own for clients, CVRD (RIO) is down a lot from its high. This is a name I have owned for a long time for some clients and one of the ones I reduced in late April. Brazil has been pounded in this but CVRD has good news, they successfully negotiated 19% price increases with China. Maybe that is not so good, last year's increase was about 70%.
Here is the thing with Brazil. They have stuff the world needs. Regardless of the volatility in stock prices, currencies or commodity prices, they still have the resources. The same is true for Russia.
My view is that a 2% weight in a stock form one of these places can help overall returns. If you have three or four stocks totaling 6%-8% that all go down by a third, the result might be that you lag for a little while, not so bad. When you get into the 20%-30% range the consequences become more severe.
Emerging markets are just an asset class. They were one if the hot ones but too much of anything is a bad idea and that is coming home to roost for some folks now.
That this part of the market is now down does not change the role that emerging markets play in a diversified portfolio.
Read more!
Good Reader Question
Some of you may know that most of the content here gets rerun on the various blogs on the Seeking Alpha Network. A reader left the following question on my post that tried to answer another reader's similar question.
Any comments on the following emerging markets:Mexico , Brazil
Giving a specific answer is tough because I do not know this person, what he owns or how much he owns.
The comment says he has an exit strategy, this is the most important thing. In a given situation a particular exit strategy may not work but the discipline to actually act on your plan is the important thing. Over time an investor can learn more about their plan's strengths and weaknesses and let it evolve over time. Where this stuff is concerned I am not really trying to be exactly right, I am trying to miss most of down a lot, should it happen.
I was public about when I reduced emerging market exposure so it is tough for me to say he should sell now if he has not sold any previously. Leaving what the market might do out of the equation, the reader now knows whether he has too much emerging market exposure (this is totally a personal decision) or not. If you can't handle the volatility you should reduce regardless of what might happen next. Sleep is more important than basis points.
One important thing is that I would never advise zero exposure to emerging markets. I believe in having at least a little in everything. Emerging markets will turn around and snap back and guessing when that will happen is probably tough to do. Having at least some EM in your portfolio means you don't have to be as correct as having zero and guessing when to add.
As for the countries he mentions in his question, they all have obvious fundamental catalysts that I believe in and they all have potential problems that are playing out now. The asset class has always been volatile and will always be volatile; there is no getting away from that.
This is similar to the reader here asking about the Russia Fund. He said he had 10% in the Third Millennium Russia Fund. First of all that is a lot, regardless of the future direction. Russia is no going out of business, the Rosneft IPO will likely create more investor excitement for Russia but that is scheduled for July and the energy theme is not over. Russia is caught up in the sell the emerging markets trade now under way. I would be guessing as to whether it is over yet (my guess is that most but not all of the selling is done, just a guess). Is the 10% before of after the decline? That would be way too much for me. George is right, the stars of the fund means nothing.
One administrative note to follow up on the business from yesterday; I have this site and write the way I do because it is fun for me. I enjoy trying to help people so whatever your expectations are, you need to get a grasp of that point. Thanks for the positive comments and yes it is water off my back.
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Any comments on the following emerging markets:
Giving a specific answer is tough because I do not know this person, what he owns or how much he owns.
The comment says he has an exit strategy, this is the most important thing. In a given situation a particular exit strategy may not work but the discipline to actually act on your plan is the important thing. Over time an investor can learn more about their plan's strengths and weaknesses and let it evolve over time. Where this stuff is concerned I am not really trying to be exactly right, I am trying to miss most of down a lot, should it happen.
I was public about when I reduced emerging market exposure so it is tough for me to say he should sell now if he has not sold any previously. Leaving what the market might do out of the equation, the reader now knows whether he has too much emerging market exposure (this is totally a personal decision) or not. If you can't handle the volatility you should reduce regardless of what might happen next. Sleep is more important than basis points.
One important thing is that I would never advise zero exposure to emerging markets. I believe in having at least a little in everything. Emerging markets will turn around and snap back and guessing when that will happen is probably tough to do. Having at least some EM in your portfolio means you don't have to be as correct as having zero and guessing when to add.
As for the countries he mentions in his question, they all have obvious fundamental catalysts that I believe in and they all have potential problems that are playing out now. The asset class has always been volatile and will always be volatile; there is no getting away from that.
This is similar to the reader here asking about the Russia Fund. He said he had 10% in the Third Millennium Russia Fund. First of all that is a lot, regardless of the future direction. Russia is no going out of business, the Rosneft IPO will likely create more investor excitement for Russia but that is scheduled for July and the energy theme is not over. Russia is caught up in the sell the emerging markets trade now under way. I would be guessing as to whether it is over yet (my guess is that most but not all of the selling is done, just a guess). Is the 10% before of after the decline? That would be way too much for me. George is right, the stars of the fund means nothing.
One administrative note to follow up on the business from yesterday; I have this site and write the way I do because it is fun for me. I enjoy trying to help people so whatever your expectations are, you need to get a grasp of that point. Thanks for the positive comments and yes it is water off my back.
Read more!
Wednesday, May 24, 2006
Now Negative For The Year
I just looked up and saw the S&P 500 print with a 1246 handle. The year end number was 1248. Doh!
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Demand For Equities
Demand looks lousy. The S&P 500 is below its 200 DMA. The Vonage IPO has turned out to be a cluster. This business with the bird flu in Indonesia (I first heard about this on Barry's site) is, well, I don't know what.
I heard that it has gone from human to human in that poor family in Indonesia but they are saying it has not mutated. Yeah, I don't know either.
Something like bird flu presents an interesting dilemma. The market knows about the bird flu, so it has to be priced in, so some would say. But can the market gage what the economic fallout from a worldwide pandemic would be? If you say no, that means the markets would fall a lot, I might think that the US dollar and US government bonds would rally, at least initially. If you answer yes to the market knowing what the economic impact would be, then you must believe that stocks won't really be damaged by a pandemic.
God help me, I'm not sure I have enough faith in the everything is always priced in theory.
This all begs another question. With everything seeming so negative, could the market rally here for no reason at all? The rational answer is no but obviously the market does not need to be rational.
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I heard that it has gone from human to human in that poor family in Indonesia but they are saying it has not mutated. Yeah, I don't know either.
Something like bird flu presents an interesting dilemma. The market knows about the bird flu, so it has to be priced in, so some would say. But can the market gage what the economic fallout from a worldwide pandemic would be? If you say no, that means the markets would fall a lot, I might think that the US dollar and US government bonds would rally, at least initially. If you answer yes to the market knowing what the economic impact would be, then you must believe that stocks won't really be damaged by a pandemic.
God help me, I'm not sure I have enough faith in the everything is always priced in theory.
This all begs another question. With everything seeming so negative, could the market rally here for no reason at all? The rational answer is no but obviously the market does not need to be rational.
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Spectacularly Wrong...
...About gold.
The support line I wrote about held for a couple of days and was then breached like it wasn't there. Several readers called me out as being wrong, good for them. Perhaps it was the blow to the head I took?
The market is below is 200 DMA. I posted yesterday about selling one stock at the close. Given the cash raised recently I may hold off on anymore sales today, I if I do sell something I will let you know.
The dollar is getting hit on that durable goodies number, which makes the gold decline puzzling (but makes me no less wrong).
Ed Keon now says equities are cheap? This guy is wrong more often than any other person with a similar title. Here I think he is trying to catch a falling knife.
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The support line I wrote about held for a couple of days and was then breached like it wasn't there. Several readers called me out as being wrong, good for them. Perhaps it was the blow to the head I took?
The market is below is 200 DMA. I posted yesterday about selling one stock at the close. Given the cash raised recently I may hold off on anymore sales today, I if I do sell something I will let you know.
The dollar is getting hit on that durable goodies number, which makes the gold decline puzzling (but makes me no less wrong).
Ed Keon now says equities are cheap? This guy is wrong more often than any other person with a similar title. Here I think he is trying to catch a falling knife.
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Tuesday, May 23, 2006
Taking The Chance
I kind of listened to my own opinion from this morning. I sold half of an industrial stock I own that is up a lot. It still finished the day higher despite the turnaround in the market this afternoon.
I have been extra concerned about the market the last few days (I have mentioned this) and this morning I wondered, in a previous post if the great start today might fade. I admit to being very surprised.
I'm sure you will be able to find more intelligent commentary about the turn around today, but this seems like lousy action.
If I am wrong and the market skyrockets from here I might lag a little which, given my lack of faith for the next few weeks is OK by me.
I said earlier I would update the blog with the when if not the what; well this is a little bit of when.
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I have been extra concerned about the market the last few days (I have mentioned this) and this morning I wondered, in a previous post if the great start today might fade. I admit to being very surprised.
I'm sure you will be able to find more intelligent commentary about the turn around today, but this seems like lousy action.
If I am wrong and the market skyrockets from here I might lag a little which, given my lack of faith for the next few weeks is OK by me.
I said earlier I would update the blog with the when if not the what; well this is a little bit of when.
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More Gold
On Friday I put up a similar chart of gold and wondered whether I saw a potential trend line that could serve as support.So a couple of days later it appears to have held. Well that is nice but what is next? The trend line I have pointed to in both charts seems to have some relevance. If so, it makes sense to think it can be relevant a little while longer.
If you are looking for a quick trade I don't have much to offer. If you buy into the idea of gold as portfolio diversifier and you don't have any exposure, I think this may be a good point to enter.
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Thank Goodness That's Over!
Well, I wouldn't make that bet. Now that you are feeling good, what should you do? Do you own too much of fill in the blank, not enough? Earlier today I told the panicked reader (publicly not privately) to reduce while the market was up.
Now I don't know if the S&P 500 is going to go back to the flat line or not today but the little lift so far is a good chance to make changes for people who were too scared yesterday.
You have to be able to sleep with what you've got. I am repeating myself from this morning because this is very important for managing your own portfolio. I am not trying to predict anything. If you were really upset yesterday you are probably feeling much better today, take advantage of it, if you have recently learned you have the wrong mix.
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Now I don't know if the S&P 500 is going to go back to the flat line or not today but the little lift so far is a good chance to make changes for people who were too scared yesterday.
You have to be able to sleep with what you've got. I am repeating myself from this morning because this is very important for managing your own portfolio. I am not trying to predict anything. If you were really upset yesterday you are probably feeling much better today, take advantage of it, if you have recently learned you have the wrong mix.
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What Can Be Learned Here?
A persistent reader left the following comment.
Roger and everyone??,
REAL question. I own funds that have been killed in the last few weeks, as has everyone, BUT some of them like my Latin America, Russian and Emerging Market funds {All rated 5 stars} are down almost 20% in those few weeks. Is their a end in sight??? Why are these markets getting killed more then domestic? I am down 8% or so domestically, but nothing like what has happened with foreign. Thoughts and ideas???? Do I hold on all the Foreign funds or sell into the panic {which I know is stupid unless it keeps getting smashed}?
OK, there is a lot there. It seems, but there is no way to know, that this person has assigned a fair bit of emotion to this. My initial reaction is that this person has too much volatility for their own comfort level, down 8% on domestic seems like a lot when compared to how much the S&P went down.
That his emerging market funds are five-star means nothing to me. When you buy into different parts of the market you are capturing certain effects, for better or for worse. If emerging goes down by X, you have to expect that whatever you own in that area is going to be close. A couple of individual emerging market stocks I own for clients did a little better than the ETF I use, which I find interesting. One of the stocks I use did almost the exact same thing as the ETF.
Capturing the effect is why you own it in the first place. Perhaps you own too much?
The reader asks why this is happening to emerging markets. As an asset class they went up a lot. Emerging markets are likely to do better (this may be more about perception and be short lived) with a the dollar a little steadier than it has been. Recall the dollar puked down for 71 days in a row (or thereabouts) which contributed to the emerging market dislocation we just had. A weaker dollar is OK, the move down was quite severe which I believe (not an original thought) dominoed into the emerging market stock decline.
The reader asks if he should sell. Right now this stuff is all up a lot today. If he owned things he could sell during the day I would tell him to reduce right now, 45 minutes into the day. This has nothing to do with forward looking analysis, my take on the email is that he owns too much, emotionally. Further I don't think this person has any type of exit strategy at all, which I think is a big mistake, given the tone of his comment.
I was very open about the timing of how I reduced my exposure in this part of the market. The sales in April look good for now and the partial sale yesterday of IIF looks bad for now, goes with the territory. Good or bad hopefully the limited role played by emotion came through in the writing. The IIF sale may appear to be one of emotion but I decided over the weekend that I would probably sell and confirmed it when the market opened.
Hopefully you can learn from this person's experience.
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Roger and everyone??,
REAL question. I own funds that have been killed in the last few weeks, as has everyone, BUT some of them like my Latin America, Russian and Emerging Market funds {All rated 5 stars} are down almost 20% in those few weeks. Is their a end in sight??? Why are these markets getting killed more then domestic? I am down 8% or so domestically, but nothing like what has happened with foreign. Thoughts and ideas???? Do I hold on all the Foreign funds or sell into the panic {which I know is stupid unless it keeps getting smashed}?
OK, there is a lot there. It seems, but there is no way to know, that this person has assigned a fair bit of emotion to this. My initial reaction is that this person has too much volatility for their own comfort level, down 8% on domestic seems like a lot when compared to how much the S&P went down.
That his emerging market funds are five-star means nothing to me. When you buy into different parts of the market you are capturing certain effects, for better or for worse. If emerging goes down by X, you have to expect that whatever you own in that area is going to be close. A couple of individual emerging market stocks I own for clients did a little better than the ETF I use, which I find interesting. One of the stocks I use did almost the exact same thing as the ETF.
Capturing the effect is why you own it in the first place. Perhaps you own too much?
The reader asks why this is happening to emerging markets. As an asset class they went up a lot. Emerging markets are likely to do better (this may be more about perception and be short lived) with a the dollar a little steadier than it has been. Recall the dollar puked down for 71 days in a row (or thereabouts) which contributed to the emerging market dislocation we just had. A weaker dollar is OK, the move down was quite severe which I believe (not an original thought) dominoed into the emerging market stock decline.
The reader asks if he should sell. Right now this stuff is all up a lot today. If he owned things he could sell during the day I would tell him to reduce right now, 45 minutes into the day. This has nothing to do with forward looking analysis, my take on the email is that he owns too much, emotionally. Further I don't think this person has any type of exit strategy at all, which I think is a big mistake, given the tone of his comment.
I was very open about the timing of how I reduced my exposure in this part of the market. The sales in April look good for now and the partial sale yesterday of IIF looks bad for now, goes with the territory. Good or bad hopefully the limited role played by emotion came through in the writing. The IIF sale may appear to be one of emotion but I decided over the weekend that I would probably sell and confirmed it when the market opened.
Hopefully you can learn from this person's experience.
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Monday, May 22, 2006
That Big Rally At The Close?
I am at our office in Phoenix so I don't have TiVo (so I can't get his name) but they just had one of the crew from Fifth Third on saying that the rally at the end of the day was encouraging.
He was interviewed from his trading floor so had to know what was going on.
Being optimistic right here may be the right call but I think it is tough to take a lot of positives from the late action today.
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Egads
The market is getting crushed, all the themes I think are important for the next few years are really getting hit and I am hiding under my desk!
Well no, that is not right. I sold about half of what was left in the India Fund (IIF), after selling some in late April, for the clients that had that one, at the open.
If you don't know, India, much more so than China, depends much more on foreign stock market investment and so there is visibility for that to dry up for a while in a way I think is different than other emerging markets.
It looks as though the 200 DMA is 1257 so the will be the point where I start to reduce. I'll detail the "when" on the blog if not the "what."
Regardless of how significant or how important this turns out to be, it goes with the territory of owning stocks. I know from talking to a couple of clients that people are nervous but importantly for them I am not (emotionally). I am concerned this will be serious but we can't know yet.
The move to date is not new. If it turns out to be a serious decline, that won't be new either. If you are really sweating this move and can't overcome the worry, I'm not sure what to say.
Well maybe one thing. In 1973 the S&P 500 was down 17%. The next year it was down 29%. If you go to BigCharts.com and look at all data for the SPX, the forty whatever percent decline from those two years is barely visible. Here is another little fun fact. Did you know that there was a crash in 1989? The S&P 500 fell about 5.5% on October 13, 1989 when the UAL LBO failed. That caused a fair bit of panic and it literally invisible on a long term chart.
To repeat a theme from the last few days, stick your plan, calm down and know that your emotion plays no role in what the market will do.
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Well no, that is not right. I sold about half of what was left in the India Fund (IIF), after selling some in late April, for the clients that had that one, at the open.
If you don't know, India, much more so than China, depends much more on foreign stock market investment and so there is visibility for that to dry up for a while in a way I think is different than other emerging markets.
It looks as though the 200 DMA is 1257 so the will be the point where I start to reduce. I'll detail the "when" on the blog if not the "what."
Regardless of how significant or how important this turns out to be, it goes with the territory of owning stocks. I know from talking to a couple of clients that people are nervous but importantly for them I am not (emotionally). I am concerned this will be serious but we can't know yet.
The move to date is not new. If it turns out to be a serious decline, that won't be new either. If you are really sweating this move and can't overcome the worry, I'm not sure what to say.
Well maybe one thing. In 1973 the S&P 500 was down 17%. The next year it was down 29%. If you go to BigCharts.com and look at all data for the SPX, the forty whatever percent decline from those two years is barely visible. Here is another little fun fact. Did you know that there was a crash in 1989? The S&P 500 fell about 5.5% on October 13, 1989 when the UAL LBO failed. That caused a fair bit of panic and it literally invisible on a long term chart.
To repeat a theme from the last few days, stick your plan, calm down and know that your emotion plays no role in what the market will do.
Read more!
Article About Foreign Investing
Whew, rough weekend. This is what I looked like this morning.
The Sunday New York Times had a good article about investing in foreign stocks.
The article quoted several strategists with various ideas on how much foreign to have. One big positive was that no one quoted said that instead of owning foreign stocks just buy stocks of companies that do business overseas.
Buying US multi-nationals is fine and it is suggested in the article but they are not proxies for foreign stocks. In the past, there have been many people in articles like this saying that they are. Thinking you have foreign exposure because you have Proctor & Gamble (fine company though it is) is wrong, in my opinion.
One of the things that the blogosphere delivers to do-it-yourselfers is how to look at markets and investing beyond the standard fare from main stream media. Maybe main stream media is taking a page from the blogosphere.
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Sunday, May 21, 2006
The Big Picture For The Week Of May 21, 2006
There is an interesting interview in Barron's this week with "Team Kaminsky" from Neuberger Berman. You are probably familiar with Gary from his many past appearances on CNBC. The article has a table of their top ten holdings with percentages.
Suncor (SU) 9.73%
Arch Coal (ACI) 6.67%
General Electric 6.06%
Brookfield Assest Mgmt (BAM) 5.49%
Capital One Financial (COF) 5.08%
American Tower (AMT) 5.03%
Citigroup (C) 4.98%
White Mountain Ins (WMT) 4.80%
Kinder Morgan (KMI) 4.59%
Hewlett Packard (HPQ) 4.02%
Their long-term results are very good so let's be clear about that. I own Suncor personally so I am obviously favorably disposed to the name but almost 10% in that name is a lot. I don't own ACI but that is also a hot potato and I imagine AMT is a little jumpy too. I'm sure they realize the type of volatility they are bringing to the portfolio and do in fact want that much beta.
I think Barron's might be doing do-it-yourselfers a disservice with this top-ten in that this portfolio would be tough to manage from home. I think it would be tough to know when to reduce the energy, we can see almost 17% and there could be more in the rest of the portfolio, into a serious decline for the group and when to hold.
Actually you could argue that more than 17% of the portfolio is in energy when you factor the betas of SU (1.43) and ACI (1.58). In theory you could say that the weight in energy is 24% when you multiply the weights by their respective betas. Some folks buy into that sort of calculation and some do not but either way there is a lot of high octane energy in the portfolio.
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Suncor (SU) 9.73%
Arch Coal (ACI) 6.67%
General Electric 6.06%
Brookfield Assest Mgmt (BAM) 5.49%
Capital One Financial (COF) 5.08%
American Tower (AMT) 5.03%
Citigroup (C) 4.98%
White Mountain Ins (WMT) 4.80%
Kinder Morgan (KMI) 4.59%
Hewlett Packard (HPQ) 4.02%
Their long-term results are very good so let's be clear about that. I own Suncor personally so I am obviously favorably disposed to the name but almost 10% in that name is a lot. I don't own ACI but that is also a hot potato and I imagine AMT is a little jumpy too. I'm sure they realize the type of volatility they are bringing to the portfolio and do in fact want that much beta.
I think Barron's might be doing do-it-yourselfers a disservice with this top-ten in that this portfolio would be tough to manage from home. I think it would be tough to know when to reduce the energy, we can see almost 17% and there could be more in the rest of the portfolio, into a serious decline for the group and when to hold.
Actually you could argue that more than 17% of the portfolio is in energy when you factor the betas of SU (1.43) and ACI (1.58). In theory you could say that the weight in energy is 24% when you multiply the weights by their respective betas. Some folks buy into that sort of calculation and some do not but either way there is a lot of high octane energy in the portfolio.
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Friday, May 19, 2006
Big Up Day, Now What?
Well maybe not that big and maybe not even up by the end of the day.
The thing is though, not much has changed. If 1261 (the lowest number I saw) turns out to be the low of this correction and everything falls back into place in the next few days or weeks you maybe have had a nice little stress test for your portfolio. So how did it hold up?
A while back I mentioned in a post that the dollar would likely correct some of the massive selling and portfolios heavy in foreign stocks will lag when that happens. That has been the case this week. That was an important comment I made. In your portfolio you favor certain things, I'm sure. You need to understand when your portfolio will lag so that when it happens you don't make a poor decision.
On Wednesday of this week I mentioned a couple of times that the market has to have an up day in here soon. Maybe today is it? One thing to consider is that perhaps today, if it keeps the gain, is just absorbing the over sold condition and that next week is just as ugly. I don't know and I am not that concerned about trying to guess. I am concerned about the market right now as I said the other day but my only plan is to stick to my strategy.
OG left a comment earlier about speaking up for the fraidy cats. First, be neither brave nor afraid. A 5% decline is still not a lot. OG said he raised a little cash (sounds good so far, me too) and that he is using 1240 on the S&P 500 to sell more. I have no idea why he chose 1240, perhaps I could guess right but it does not matter. He has a clear and simple plan, probably something he figured out earlier and all he has to do now is stick to it.
That is all you need to do too.
There is nothing over that last couple of weeks that is new to the market. Don't get upset, take a breath, relax and stick to your plan.
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The thing is though, not much has changed. If 1261 (the lowest number I saw) turns out to be the low of this correction and everything falls back into place in the next few days or weeks you maybe have had a nice little stress test for your portfolio. So how did it hold up?
A while back I mentioned in a post that the dollar would likely correct some of the massive selling and portfolios heavy in foreign stocks will lag when that happens. That has been the case this week. That was an important comment I made. In your portfolio you favor certain things, I'm sure. You need to understand when your portfolio will lag so that when it happens you don't make a poor decision.
On Wednesday of this week I mentioned a couple of times that the market has to have an up day in here soon. Maybe today is it? One thing to consider is that perhaps today, if it keeps the gain, is just absorbing the over sold condition and that next week is just as ugly. I don't know and I am not that concerned about trying to guess. I am concerned about the market right now as I said the other day but my only plan is to stick to my strategy.
OG left a comment earlier about speaking up for the fraidy cats. First, be neither brave nor afraid. A 5% decline is still not a lot. OG said he raised a little cash (sounds good so far, me too) and that he is using 1240 on the S&P 500 to sell more. I have no idea why he chose 1240, perhaps I could guess right but it does not matter. He has a clear and simple plan, probably something he figured out earlier and all he has to do now is stick to it.
That is all you need to do too.
There is nothing over that last couple of weeks that is new to the market. Don't get upset, take a breath, relax and stick to your plan.
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Not So Solid Gold
I try not to use too much jargon on this site but gold seems to be getting Donkey-Konged (small humor attempt).I added the purple trend line and I have no idea if it will turn out to be technically significant or not. Most of the mining stocks are doing worse than the metals.
I did a podcast yesterday (which will be available this afternoon) for WallSt.Net and one of the stocks was a silver stock and whether yesterday's closing price was a good entry point or not. My take was this is a falling knife zone and I guess today the knife is still falling.
The point of this post is to underscore something I have been trying to get across which is moderation. I know there are a lot of people with way too much in the mining stocks. Whatever the next hot thing is, there will be investors with too much there as well.
Gold stocks are such a small segment of the market (in terms of cap size) that it might as well not even exist. That is not a bad starting point to think about how much you should have. I first wrote about gold when it was below $400. My sole purpose in owning it then was that it goes up when bad things happen in the world. I felt then, as I do now, that it will be up on days when external shocks hurt the stock market. I never correctly predicted this move up I just was writing about its diversification benefits.
To me none of the above has changed. If some horrible external shock happens, I expect gold to go up. The effect is less volatility on the portfolio.
If you have too much gold you have created more volatility in your portfolio not less. If you have succumbed to the siren song of the AMEX-listed microcaps you have created a lot of volatility for yourself.
If this week you have said to yourself, I wish I had less, well, you have too much.
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Humorous Introspection
David Faber just made a funny comment that he seems to be the only journalist covering the Aztar story. I fell over laughing. My early morning routine is such that I am about 15 minutes behind on the TiVo until about 7 am (remember the market opens at 6:30 here), and I blast through his reports.
I TiVo a couple of things on CNBC Europe overnight that I try to zip through to get to the interviews. While this may seem insane to you, as it does my wife, the content is excellent.
So now you have a little glimpse into my routine but now that David realizes no one cares about the things he reports on, maybe someone can send the same message to Charlie. How many days are we going to be punished with the Milberg-Weiss (I don't even care enough to check the spelling) non-story?
I wonder how much money they pay these two guys and what network could do if they added that money back into the budget?
Let's try something. If you or anyone you know has something positive to say please leave a comment. If your opinion is the same as mine, please do not. If, as I suspect, there are no comments by the end of the day I will email this post to the network and perhaps this site can help be an agent of change!
I don't believe it either but it is worth the shot.
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I TiVo a couple of things on CNBC Europe overnight that I try to zip through to get to the interviews. While this may seem insane to you, as it does my wife, the content is excellent.
So now you have a little glimpse into my routine but now that David realizes no one cares about the things he reports on, maybe someone can send the same message to Charlie. How many days are we going to be punished with the Milberg-Weiss (I don't even care enough to check the spelling) non-story?
I wonder how much money they pay these two guys and what network could do if they added that money back into the budget?
Let's try something. If you or anyone you know has something positive to say please leave a comment. If your opinion is the same as mine, please do not. If, as I suspect, there are no comments by the end of the day I will email this post to the network and perhaps this site can help be an agent of change!
I don't believe it either but it is worth the shot.
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Negative Reader Sentiment
May I am being too simplistic but doesn't the current market recipe call for an extended trend down.
Let's look at the ingredients...
-Inflation up
-Dollar down
-interest rates rising
-foreign selloff of US debt
-commodities in upward trend
-Huge tax cut (on capital gains and dividends)
-Nice run up in equities since Oct 2005
To me this is the perfect recipe for the sell side to dump all their equities on the sheep that listen to the likes of Cramer, Kudlow and the rest of the CNBC hype machine.
Readers know I don't expect much for the year. The "ingredients" listed by the reader all make sense to me as negatives except for the tax cut. I could also add this is the worst year in the presidential cycle, the economic expansion is long in the tooth, the stock market cycle is long in the tooth and I'll throw in the deficits too.
There are two important concepts (to me anyway) that are missing from the reader's comment. No matter what you think about the market I think it is wise to know and be able to articulate the other side of your trade. Earnings growth is strong, the economy is strong, interest rates are low by historical standards and the fed is just about done.
Weigh the two sides and draw a conclusion. I still expect the S&P 500 to be down mid-single digits on the year but I am always in touch with both sides of the trade.
The other thing that I think the reader has left out is that even if everything lines up on one side of the trade as he suggests, the market can still go the other way. This happens over and over throughout history, right? The stock market confounds most participants most of the time doesn't it? You can decide if that last sentence makes any sense to you or not but I would not assume the market has to do something. This is a big reason why I do not make extreme bets with client portfolios.
If I think the market has to go down, raise 100% cash and then the market has its one year in a decade where it goes up 30% in a year I will have done real long-term damage to clients. This is a scenario where do-it-yourselfers could do real long-term damage to themselves.
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Let's look at the ingredients...
-Inflation up
-Dollar down
-interest rates rising
-foreign selloff of US debt
-commodities in upward trend
-Huge tax cut (on capital gains and dividends)
-Nice run up in equities since Oct 2005
To me this is the perfect recipe for the sell side to dump all their equities on the sheep that listen to the likes of Cramer, Kudlow and the rest of the CNBC hype machine.
Readers know I don't expect much for the year. The "ingredients" listed by the reader all make sense to me as negatives except for the tax cut. I could also add this is the worst year in the presidential cycle, the economic expansion is long in the tooth, the stock market cycle is long in the tooth and I'll throw in the deficits too.
There are two important concepts (to me anyway) that are missing from the reader's comment. No matter what you think about the market I think it is wise to know and be able to articulate the other side of your trade. Earnings growth is strong, the economy is strong, interest rates are low by historical standards and the fed is just about done.
Weigh the two sides and draw a conclusion. I still expect the S&P 500 to be down mid-single digits on the year but I am always in touch with both sides of the trade.
The other thing that I think the reader has left out is that even if everything lines up on one side of the trade as he suggests, the market can still go the other way. This happens over and over throughout history, right? The stock market confounds most participants most of the time doesn't it? You can decide if that last sentence makes any sense to you or not but I would not assume the market has to do something. This is a big reason why I do not make extreme bets with client portfolios.
If I think the market has to go down, raise 100% cash and then the market has its one year in a decade where it goes up 30% in a year I will have done real long-term damage to clients. This is a scenario where do-it-yourselfers could do real long-term damage to themselves.
Read more!
Thursday, May 18, 2006
Thursday Was Not Good
It may not have been bad, but it was not good.
The market has to have an up day or two. Obviously that is a preposterous statement that it has to but in the past, down many days in a row results in some sort of respite.
But who cares about a respite? The more important question what is going to happen over the next few months and longer? Serious correction still to come or is what we have had the extent of the correction?
Most of the day seemed to evidence a lack of will by anyone until the end of the day when more selling ensued. People got very excited when the S&P 500 was in the 1320s but I was not. A lot of people are concerned with the market down here and right or wrong I am also concerned.
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The market has to have an up day or two. Obviously that is a preposterous statement that it has to but in the past, down many days in a row results in some sort of respite.
But who cares about a respite? The more important question what is going to happen over the next few months and longer? Serious correction still to come or is what we have had the extent of the correction?
Most of the day seemed to evidence a lack of will by anyone until the end of the day when more selling ensued. People got very excited when the S&P 500 was in the 1320s but I was not. A lot of people are concerned with the market down here and right or wrong I am also concerned.
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Titanium
In case you missed it, the titanium sector had a bubble and a blowup in the last few months.I don't follow the group very closely but I believe this is the poster-child for the pure plays. The run up was spectacular and the decline that followed was nasty, especially for people in at the wrong time.
While I have not studied the fundamentals I believe the demand for titanium is increasing because of all the titanium credit card solicitations we receive, ahem.
Something like a titanium pure play, similar to a rhodium pure play if there is such a thing, is a very narrow bet within a fairly broad theme. No matter the result of the trade, this is a much riskier way to go.
I think the broader themes can be enough for most long-term investors to capture the effect. Over the last couple of years most mining stocks or other commodity related investments are generally up a lot and I doubt too many people would say the risk taken in reckless.
You can see on the chart that starting in late April a lot more money flowed into the name for the final blowoff. This type of pattern repeats over and over and seems to always end the same so watch out.
I'm sure someone will leave a comment about the fundamental case for increased titanium demand because of airplanes and I'll concede the fundies but this post is about trades that take on more risk without necessarily offering the chance for substantially better returns to justify the risk.
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More Crash Commentary
Nicole Elliott from Mizuho made a special Thursday appearance on European Closing Bell and she is very bearish on G7 stock markets including the US. She thinks that 2006 is looking a lot like 1987. She noted that the problems of 1987 started with a backing up of bond yields. True enough that bond yields are moving higher. She also mentioned worries about the housing market then as now.
She said she hopes it will not be exactly like 1987 but she believes investors should prepare themselves for something similar. When asked why she is so bearish when so many people are so bullish (Simon Hobb's assessment of sentiment not mine) she said it just doesn't feel right and that she is not an equity analyst trying to sell something.
Nicole, as I did, made a little fun of the media for the "how close to an all-time high for the Dow" nonsense from a few days ago. Another catalyst for the call is the exchange rate. She is a dollar bear and because of the currency translations of the last few years she called investing in the US pointless.
Look, I have no idea if the market is going to crash later this year. Trying to predict a crash is beyond my skill set. But I do know that crashes come closer to bottoms than tops. I am more likely to add a little exposure into the panic than sell into it. This is more I have seen this movie before analysis. We should be more fearful of the market rolling over slowly, averaging an innocent 2% down for several months in a row.
It is too early for me to characterize the importance of this move down from 1325. I'm not saying it is unimportant I am saying I don't know. I am feeling lucky for the cash I raised in the last week in April and unlucky for not raising more.
I have decided that I will reduce a materials name, an industrial and a healthcare name (all domestic stocks) as a first move if the SPX does breach its 200 DMA, at around 1250 on the SPX (I'll worry about the exact number if we get close).
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She said she hopes it will not be exactly like 1987 but she believes investors should prepare themselves for something similar. When asked why she is so bearish when so many people are so bullish (Simon Hobb's assessment of sentiment not mine) she said it just doesn't feel right and that she is not an equity analyst trying to sell something.
Nicole, as I did, made a little fun of the media for the "how close to an all-time high for the Dow" nonsense from a few days ago. Another catalyst for the call is the exchange rate. She is a dollar bear and because of the currency translations of the last few years she called investing in the US pointless.
Look, I have no idea if the market is going to crash later this year. Trying to predict a crash is beyond my skill set. But I do know that crashes come closer to bottoms than tops. I am more likely to add a little exposure into the panic than sell into it. This is more I have seen this movie before analysis. We should be more fearful of the market rolling over slowly, averaging an innocent 2% down for several months in a row.
It is too early for me to characterize the importance of this move down from 1325. I'm not saying it is unimportant I am saying I don't know. I am feeling lucky for the cash I raised in the last week in April and unlucky for not raising more.
I have decided that I will reduce a materials name, an industrial and a healthcare name (all domestic stocks) as a first move if the SPX does breach its 200 DMA, at around 1250 on the SPX (I'll worry about the exact number if we get close).
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The Day After
It looks like we will have a positive open and I am hopeful it will stick. But what comes next?
Inflation seemed to be the concern yesterday, and if it really is increasing from where it's been that is troublesome. Notice here I am not mentioning any numbers. The trend is more important than the number right now. If inflation is more than gets reported and then the reported number goes up that is an issue.
Part of this recent volatility seems to be of Ben Bernanke's doing. He came off too dovish, perhaps overcompensated once and then again? It seems to me that when you overcompensate and correct twice, you have an accident. Ooof!
Barry Ritholtz has a post up called Bounce Test Bounce Crash in which he lays out what the next few months may look like. You can probably guess by the title what he sees coming. He says it is just a work in progress at this point so stay tuned but hey, how often is this...guy....right....wait a minute.....oh crap!
Read more!
Inflation seemed to be the concern yesterday, and if it really is increasing from where it's been that is troublesome. Notice here I am not mentioning any numbers. The trend is more important than the number right now. If inflation is more than gets reported and then the reported number goes up that is an issue.
Part of this recent volatility seems to be of Ben Bernanke's doing. He came off too dovish, perhaps overcompensated once and then again? It seems to me that when you overcompensate and correct twice, you have an accident. Ooof!
Barry Ritholtz has a post up called Bounce Test Bounce Crash in which he lays out what the next few months may look like. You can probably guess by the title what he sees coming. He says it is just a work in progress at this point so stay tuned but hey, how often is this...guy....right....wait a minute.....oh crap!
Read more!
Wednesday, May 17, 2006
Seven Days In A Row?
The Nasdaq is down seven days in a row, according to Maria, I have not counted but I do assume she can count to seven.
That is a long time to go in one direction. The next 10% in the Nasdaq might very well be down but I would not be surprised if the next 1-2% is up starting in the next day or so.
I wrote something similar about the dollar on May 9. The dollar went down 97 days in a row (or thereabouts) before rebounding a little. I am no perma bull but no trend can go in one direction forever, that is just not how things work.
Depending on what you read or what you watch you may be picking up on emotion out there, if so leave it alone.
My posts have had a theme today about using logic not emotion to make decisions. If you look at market history or better yet remember the history you have lived through then, like me, you have seen this movie before.
No one knows what will come next but you might have an opinion. That opinion will either be right or it will be wrong and you will then act accordingly. For me I will sell a name or two if we breach the 200 DMA and then go from there while trying to minimize the consequence of being wrong.
None of the above requires intelligence or trading acumen, just a plan made before things were hitting the fan which is what I have been writing about the whole time.
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That is a long time to go in one direction. The next 10% in the Nasdaq might very well be down but I would not be surprised if the next 1-2% is up starting in the next day or so.
I wrote something similar about the dollar on May 9. The dollar went down 97 days in a row (or thereabouts) before rebounding a little. I am no perma bull but no trend can go in one direction forever, that is just not how things work.
Depending on what you read or what you watch you may be picking up on emotion out there, if so leave it alone.
My posts have had a theme today about using logic not emotion to make decisions. If you look at market history or better yet remember the history you have lived through then, like me, you have seen this movie before.
No one knows what will come next but you might have an opinion. That opinion will either be right or it will be wrong and you will then act accordingly. For me I will sell a name or two if we breach the 200 DMA and then go from there while trying to minimize the consequence of being wrong.
None of the above requires intelligence or trading acumen, just a plan made before things were hitting the fan which is what I have been writing about the whole time.
Read more!
Roger=Jerk?
Earlier today I put up a post about the market only being down a little. I put the same post on the RealMoney Columnist Conversation page. One of my colleagues at RealMoney sent me a couple of emails calling me out on my down a little notion.
He noted that the Nasdaq and the Valueline Equalweight Index are both down twice as much as the S&P 500. He said that you need to look broader than SPX to make a prognosis.
There was nothing in my comments that was forward looking. My post was only about staying level headed. The other writer is a money manger too and I don't know about him but most other IM's I know, including me, benchmark to the S&P 500 so I do believe looking at it is relevant. The Nasdaq is considered to be a proxy for one sector (technology) so I never look at it to try to assess where I stand.
Long time readers probably know that I have been underweight tech for a long time, and recently sold down a little energy and emerging market exposure. While I am feeling this move down it could be worse.
I want to convey that I do not get emotional about the stock market and hopefully this is something that readers take from this site. The money I manage is long-term money. Over the long-term small moves down happen and that is just how it works.
David Taylor left a comment that the trend line for the market has been breached. Fair enough and if that is your get defenisve catalyst so be it, but stick to whatever plan you have.
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He noted that the Nasdaq and the Valueline Equalweight Index are both down twice as much as the S&P 500. He said that you need to look broader than SPX to make a prognosis.
There was nothing in my comments that was forward looking. My post was only about staying level headed. The other writer is a money manger too and I don't know about him but most other IM's I know, including me, benchmark to the S&P 500 so I do believe looking at it is relevant. The Nasdaq is considered to be a proxy for one sector (technology) so I never look at it to try to assess where I stand.
Long time readers probably know that I have been underweight tech for a long time, and recently sold down a little energy and emerging market exposure. While I am feeling this move down it could be worse.
I want to convey that I do not get emotional about the stock market and hopefully this is something that readers take from this site. The money I manage is long-term money. Over the long-term small moves down happen and that is just how it works.
David Taylor left a comment that the trend line for the market has been breached. Fair enough and if that is your get defenisve catalyst so be it, but stick to whatever plan you have.
Read more!
We Are Still Only Down A Little
The market is off to an ugly start and very few areas of the market appear to be working. The S&P 500 is down 3.5% from its May 9 closing high of 1325. While this move is not fun it is a normal move in terms of magnitude.
If you are an investor, as opposed to a trader, you need to have some sort of exit strategy in place, hopefully determined at a time that you were not nervous about the market.
It is important to really embrace the fact that down a little goes with the territory of owning stocks. Over reacting to down a little is likely to result in getting whipsawed.
Whatever your catalyst to start getting defensive is, you should stick to it. Down 5%-10% should not be a deathblow for investors with a long term focus.
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If you are an investor, as opposed to a trader, you need to have some sort of exit strategy in place, hopefully determined at a time that you were not nervous about the market.
It is important to really embrace the fact that down a little goes with the territory of owning stocks. Over reacting to down a little is likely to result in getting whipsawed.
Whatever your catalyst to start getting defensive is, you should stick to it. Down 5%-10% should not be a deathblow for investors with a long term focus.
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Biotech Blowup?
In my daily email from TheFlyOnTheWall I saw that both Lehman and Jeffries downgraded Neurocrine Bioscience (NBIX) after that company had FDA trouble that hit the market yesterday.
This is a two day chart of the stock and it does not get any worse from one day to the next for a stock than this.
Based on the reaction yesterday I am guessing this was unexpected but since I don't follow the stock I don't know, but there is something interesting in the chart that I think we can learn from.
In the last two months, before the FDA news, the stock had already started to go down at a faster rate than the rest of the sector, as measured by client holding iShares Nasdaq Biotech (IBB). NBIX was down about 25% from its March high while IBB was down about 12% in the same time period.
If the FDA problem was unlikely (again I don't know) it is tough for me to blame an analyst for that but according to Yahoo Finance there was no analyst ratings changes between January 11 (a downgrade) and May 5 (initiate with a buy-oops).
The significant lag in the stock over the last two months was a warning from the market that no one in the analyst community heeded. I looked through the headlines and saw that losses widened but that was reported in April, a month after the high was put in.
This ties into the buy and hold discussion from yesterday. A high octane stock goes down a lot more than its peers is a reason to try to do some detective work in an attempt to figure out what's wrong. If you can't figure it out, at that point you should probably sell. Even if the stock goes up a lot after you sell, owning a stock you don't understand is a bad idea more often than not.
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This is a two day chart of the stock and it does not get any worse from one day to the next for a stock than this.
Based on the reaction yesterday I am guessing this was unexpected but since I don't follow the stock I don't know, but there is something interesting in the chart that I think we can learn from.
In the last two months, before the FDA news, the stock had already started to go down at a faster rate than the rest of the sector, as measured by client holding iShares Nasdaq Biotech (IBB). NBIX was down about 25% from its March high while IBB was down about 12% in the same time period.
If the FDA problem was unlikely (again I don't know) it is tough for me to blame an analyst for that but according to Yahoo Finance there was no analyst ratings changes between January 11 (a downgrade) and May 5 (initiate with a buy-oops).
The significant lag in the stock over the last two months was a warning from the market that no one in the analyst community heeded. I looked through the headlines and saw that losses widened but that was reported in April, a month after the high was put in.
This ties into the buy and hold discussion from yesterday. A high octane stock goes down a lot more than its peers is a reason to try to do some detective work in an attempt to figure out what's wrong. If you can't figure it out, at that point you should probably sell. Even if the stock goes up a lot after you sell, owning a stock you don't understand is a bad idea more often than not.
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Tuesday, May 16, 2006
Buy and Hold Is Dead
A lot of people believe that buy and hold is dead and has been dead since the tech bubble popped, taking down the rest of the market with it.
I think just saying buy and hold is dead is too simple and dismissive. For investors, as opposed to traders, trying to construct a diversified portfolio for the long term they probably have some larger core positions and some smaller more volatile holdings. This method is common even if it isn't universal.
I think an approach to this issue that makes sense, even if it doesn't label very well, is to buy with the intention of holding. As time goes buy it may make sense to sell or reduce the name but you don't really know when you buy if you will ever need to sell.
When I first bought New Zealand Telecom in 2003 I thought it would be the type of name I would be able to hold for a long time. As time went on, things changed and I felt it was better to sell.
I think that the connotation that goes with buy and hold is that you can ignore what you own because "great companies always do well." Ignoring your holdings because of blind devotion is not something I would ever advocate.
There are other reasons to sell or reduce too. If you own a consumer stock that has doubled while the rest of the sector is up 10% in the same time frame might be a reason to reduce exposure. On the other side of the discussion if a stock is up 30% but so is its sector, selling may not be ideal.
It would be great if every stock you purchase does exactly what you expect it to and you never need to sell. I would be quite pleased with that. Of course it is unrealistic. If you own stocks you need to stay current with them and be accepting of the fact that you will need to sell a name or two every so often.
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I think just saying buy and hold is dead is too simple and dismissive. For investors, as opposed to traders, trying to construct a diversified portfolio for the long term they probably have some larger core positions and some smaller more volatile holdings. This method is common even if it isn't universal.
I think an approach to this issue that makes sense, even if it doesn't label very well, is to buy with the intention of holding. As time goes buy it may make sense to sell or reduce the name but you don't really know when you buy if you will ever need to sell.
When I first bought New Zealand Telecom in 2003 I thought it would be the type of name I would be able to hold for a long time. As time went on, things changed and I felt it was better to sell.
I think that the connotation that goes with buy and hold is that you can ignore what you own because "great companies always do well." Ignoring your holdings because of blind devotion is not something I would ever advocate.
There are other reasons to sell or reduce too. If you own a consumer stock that has doubled while the rest of the sector is up 10% in the same time frame might be a reason to reduce exposure. On the other side of the discussion if a stock is up 30% but so is its sector, selling may not be ideal.
It would be great if every stock you purchase does exactly what you expect it to and you never need to sell. I would be quite pleased with that. Of course it is unrealistic. If you own stocks you need to stay current with them and be accepting of the fact that you will need to sell a name or two every so often.
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ETF Interview
CNBC just interviewed Ron DeLegge from ETFguide.com. If you saw the interview you probably did not get much out of it. This is not Mr. DeLegge's fault. Like most ETF interviews, he was not asked the right questions.
While I hope this is not new to regular readers of this site, ETFs are just a type of investment product. A given ETF might be the single best tool for you to capture a particular effect or segment of the market or it may not, that is for you to decide.
Another aspect of ETFs is the extent to which they can serve as proxies for other things besides what the name might suggest. For example I wrote an article about the new IPOX 100 ETF (FPX) for RealMoney. In addition to capturing IPOs, fair enough if that is not too important to you, I also believe it captures small cap (tight correlation) but outperforms that segment consistently over time.
Also some of the specialized ETFs allow investors to capture some cap size diversification within certain sectors. For example the Water ETF (client and personal holding) or any of the defense sector ETFs allow for smaller cap size exposure to the industrial sector. The big industrial sector ETFs are dominated by General Electric.
I think this type of analysis stands to be far more useful than most of what we are seeing now.
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While I hope this is not new to regular readers of this site, ETFs are just a type of investment product. A given ETF might be the single best tool for you to capture a particular effect or segment of the market or it may not, that is for you to decide.
Another aspect of ETFs is the extent to which they can serve as proxies for other things besides what the name might suggest. For example I wrote an article about the new IPOX 100 ETF (FPX) for RealMoney. In addition to capturing IPOs, fair enough if that is not too important to you, I also believe it captures small cap (tight correlation) but outperforms that segment consistently over time.
Also some of the specialized ETFs allow investors to capture some cap size diversification within certain sectors. For example the Water ETF (client and personal holding) or any of the defense sector ETFs allow for smaller cap size exposure to the industrial sector. The big industrial sector ETFs are dominated by General Electric.
I think this type of analysis stands to be far more useful than most of what we are seeing now.
Read more!
New Indices, Product To Come Later?
According to IndexUniverse the CBOE has licensed a volatility index (RVX) and a buywrite index (BXR) to the Russell 2000. The article notes that investment products should not be far behind.
It would make sense that the premium taken in on a smaller cap index would be quite a bit larger than on the S&P 500 and thus any products tied to BXR should yield more than products tied to BXM or BXY. We'll see.
A reader asked about the call selling CEFs. Lately most, but not all, are down 2%-4%. This is not shocking because interest rates have gone up a lot as of late. One thought I had with these is that they would be interest rate sensitive but less so than most bond funds and that seems to be holding up for now.
I would also note that the NAVs of these funds has held up much better than the market prices. Most of the funds have seen big increases in the discount to NAV in the last few weeks. The reality is that these funds are not bond funds but the market has partially sold them down anyway.
Higher interest rates could a good thing for these funds in one respect which is that most option pricing models factor in interest rates. Higher rates could mean higher option premiums.
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It would make sense that the premium taken in on a smaller cap index would be quite a bit larger than on the S&P 500 and thus any products tied to BXR should yield more than products tied to BXM or BXY. We'll see.
A reader asked about the call selling CEFs. Lately most, but not all, are down 2%-4%. This is not shocking because interest rates have gone up a lot as of late. One thought I had with these is that they would be interest rate sensitive but less so than most bond funds and that seems to be holding up for now.
I would also note that the NAVs of these funds has held up much better than the market prices. Most of the funds have seen big increases in the discount to NAV in the last few weeks. The reality is that these funds are not bond funds but the market has partially sold them down anyway.
Higher interest rates could a good thing for these funds in one respect which is that most option pricing models factor in interest rates. Higher rates could mean higher option premiums.
Read more!
Monday, May 15, 2006
Change Creates Uncertainty
The Chairman of NZ Telecom, whom I have never seen interviewed, Roderick Deane, was on CNBC Asia last night. He is stepping down from Telecom and a couple of other boards he is on as well.
The way the interview went I was left with the impression that the proposed regulatory changes Telecom faces are a big reason for his departure. It is looking like they will have to open up to fixed line competition and allow foreign competitors access to its networks to offer competitive telecom services.
Long-term, competition is a healthy thing but shorter term it could make for a bumpy ride.
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The way the interview went I was left with the impression that the proposed regulatory changes Telecom faces are a big reason for his departure. It is looking like they will have to open up to fixed line competition and allow foreign competitors access to its networks to offer competitive telecom services.
Long-term, competition is a healthy thing but shorter term it could make for a bumpy ride.
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Pulling Back
As it is usually the case the dollar and commodity trades are correcting back, undoing the extreme positioning they built in during the last couple of weeks.
I have tried to point out the possibility for this type of move (whether it is a counter trend move or something else).
I would tell you to file this under "this is just how markets work." I do not have a real opinion about how far these assets could correct. I have exposure, both direct (the GLD ETF) and indirect (stocks from Australia, Chile and Brazil). I don't think the long term concept is in trouble but I would not want to have 20% exposed to this stuff either.
I am under the weather today so posts will be short.
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I have tried to point out the possibility for this type of move (whether it is a counter trend move or something else).
I would tell you to file this under "this is just how markets work." I do not have a real opinion about how far these assets could correct. I have exposure, both direct (the GLD ETF) and indirect (stocks from Australia, Chile and Brazil). I don't think the long term concept is in trouble but I would not want to have 20% exposed to this stuff either.
I am under the weather today so posts will be short.
Read more!
Sunday, May 14, 2006
A Blog On The Rise?
Blogging Away Debt
I stumbled across the above blog and it made a very good first impression. The first article that caught my eye was about clearing your clutter (my words not Tricia's).
I know people who are overwhelmed by garages so full of stuff from floor to ceiling that there is no room for the car. As a matter of philosophy, lots of stuff makes life more difficult than it needs to be.
The general meme of this blog is about debt reduction for what I presume is a youngish couple (but I may be wrong). Either way I wish her luck with her debt and her blog.
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I stumbled across the above blog and it made a very good first impression. The first article that caught my eye was about clearing your clutter (my words not Tricia's).
I know people who are overwhelmed by garages so full of stuff from floor to ceiling that there is no room for the car. As a matter of philosophy, lots of stuff makes life more difficult than it needs to be.
The general meme of this blog is about debt reduction for what I presume is a youngish couple (but I may be wrong). Either way I wish her luck with her debt and her blog.
Read more!
The Big Picture For The Week Of May 14, 2006
With the lousy finish to last week and the various things floating out there to potentially hurt the market there may be some people trying to predict a crash.
I won't try to predict something like that, as you can imagine crash calling is pretty hit or miss, mostly miss.
The best thing to do today might be to remind readers of the history of how crashes usually work. Time and again selling into the face of a crash has been the wrong thing to do. Crashes are not bear markets. Bear markets start slowly over a period of several months.
Even the popping of the tech bubble was a multi month process. Six months after the top, the market was still in down a little territory (down about 10%).
Hopefully if you have been reading this site for a while you own one or two things that might go up in the face of a crash. If the market does crash it probably makes sense to sell or reduce positions in inverse index funds.
A crash will not cause companies to go out of business even if they do puke down. In the face of a crash you will likely read and hear a lot of emotion from many participants. As you read this now, what is better, reacting with logic or reacting with emotion?
The fact is the market has endured crashes before. There is nothing new about crashes.
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I won't try to predict something like that, as you can imagine crash calling is pretty hit or miss, mostly miss.
The best thing to do today might be to remind readers of the history of how crashes usually work. Time and again selling into the face of a crash has been the wrong thing to do. Crashes are not bear markets. Bear markets start slowly over a period of several months.
Even the popping of the tech bubble was a multi month process. Six months after the top, the market was still in down a little territory (down about 10%).
Hopefully if you have been reading this site for a while you own one or two things that might go up in the face of a crash. If the market does crash it probably makes sense to sell or reduce positions in inverse index funds.
A crash will not cause companies to go out of business even if they do puke down. In the face of a crash you will likely read and hear a lot of emotion from many participants. As you read this now, what is better, reacting with logic or reacting with emotion?
The fact is the market has endured crashes before. There is nothing new about crashes.
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Friday, May 12, 2006
USA Number 1
Ted Parrish from Henssler just said that the US is the best place to invest. He said the commodities and emerging markets are overvalued. He said there are more negatives abroad than in the US. The US markets are the cheapest and offer the best returns over the next 3-5 years.
He could be right about all of it I suppose. I would ask Ted if he has ever been correct about foreign markets outperforming domestic markets. I would listen more to his opinion if it was not perpetually the same no matter what was going on in the world.
Do I have this wrong?
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He could be right about all of it I suppose. I would ask Ted if he has ever been correct about foreign markets outperforming domestic markets. I would listen more to his opinion if it was not perpetually the same no matter what was going on in the world.
Do I have this wrong?
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Yet More Currency
I had a lot of comments left on my post this morning about Market Angst caused by the dollar.
One reader asked what I meant by re-pricing as opposed to normal market gyrations. I'll try to explain with an analogy. In May 2003 Genentech (DNA) had huge news that took the stock from about $35 to $55 overnight. From there it went to $70 in very short order. The market re-priced the future significance of Avastin. The things that threaten the dollar, the stuff that dollar bears have writing about forever, may have kicked up a notch with some new visibility toward what the Bernanke years might look like or maybe there is something else.
Another reader pointed to 80 as a line in the sand for the dollar index, currently it is around 84. OK, lets keep an eye on 80.
RW asks whether at the same time it was taking away (raising rates) the Fed was also giving (adding liquidity)? I'm not sure about that in the current announcement but money supply has increased by more than 10%.
Roberto left a very dollar bearish comment and asked about the now forgotten (by the media) Iranian Oil Bourse. He asked for my take on the importance of oil trading in euros. The Iranian bourse by itself is not a concern to me because I don't think the world is going to line up to trade oil with Iranin this manner. I do view it as a start to something bigger. I think it creates a clear path to less global demand for US dollars.
This will lead to the need for a re-pricing of our currency. If this holds water I would expect it to play out over several years, cause some discomfort (higher interest rates and a weaker dollar) but not cause financial Armageddon.
If this happens and the magnitude is worse than I think it would cause a lot of things to get hit hard. The last couple of days have been very ugly. They could be a microcosm if the magnitude is bad.
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One reader asked what I meant by re-pricing as opposed to normal market gyrations. I'll try to explain with an analogy. In May 2003 Genentech (DNA) had huge news that took the stock from about $35 to $55 overnight. From there it went to $70 in very short order. The market re-priced the future significance of Avastin. The things that threaten the dollar, the stuff that dollar bears have writing about forever, may have kicked up a notch with some new visibility toward what the Bernanke years might look like or maybe there is something else.
Another reader pointed to 80 as a line in the sand for the dollar index, currently it is around 84. OK, lets keep an eye on 80.
RW asks whether at the same time it was taking away (raising rates) the Fed was also giving (adding liquidity)? I'm not sure about that in the current announcement but money supply has increased by more than 10%.
Roberto left a very dollar bearish comment and asked about the now forgotten (by the media) Iranian Oil Bourse. He asked for my take on the importance of oil trading in euros. The Iranian bourse by itself is not a concern to me because I don't think the world is going to line up to trade oil with Iranin this manner. I do view it as a start to something bigger. I think it creates a clear path to less global demand for US dollars.
This will lead to the need for a re-pricing of our currency. If this holds water I would expect it to play out over several years, cause some discomfort (higher interest rates and a weaker dollar) but not cause financial Armageddon.
If this happens and the magnitude is worse than I think it would cause a lot of things to get hit hard. The last couple of days have been very ugly. They could be a microcosm if the magnitude is bad.
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In The Works
I have had two emails/comments about a new product in the works from Deutsche Bank that will invest in currencies in an ETF format. For now the name is DB Currency Index Value Fund and will have ticker (DBV). The folks over at IndexUniverse call the fund a doozy.
According to IndexUniverse the fund will go long the three highest yielding currencies of the G10 currencies and go short the three lowest yielding currencies of the G10. It will exclude the US dollar. The three currencies it goes long will be leveraged by a factor of two.
The general idea behind the concept is that higher yielding currencies tend to outperform lower yielding currencies. Naturally Deutsche Bank has back tested data that makes this index, called the G10 Currency Future Harvest Index, look compelling.
This is an actively managed product, it will rebalance quarterly, compared to the Euro Currency Trust (FXE) and the proposed currency ETFs that will passively capture the Aussie, Mexican Peso, Swissi, Swedish krona, loonie and the British pound.
I think this can be a good idea for investors that want to diversify out of some of their dollar exposure. Like most investment products there is a flaw and this one, while obvious, may not be a huge negative in terms of results but needs to be understood nonetheless.
The index is built on a truism that higher yielding currencies generally do better than lower yielding currencies. Another truism is that currencies tend to do well when interest rates start to go up. This is one of the reasons I have been favorable to Sweden, the Riksbank (Swedish central bank) is in the early stages of a tightening cycle. Ditto the Norges Bank in Norway.
Viewed as an asset class, DBV, if it comes, will do the job of providing exposure which is the important thing. That it will or will not be the single best way to own foreign currency is far less important.
This type of new, for most people, asset class diversification is something I have been writing about for a while. I have been writing that I think it will become more important for US based investors and that there will be more and more products that will allow different ways to access currencies.
To repeat something from earlier this week, currency products should not be thought of as low risk equity investments. They should be thought of as high risk cash investments.
Read more!
According to IndexUniverse the fund will go long the three highest yielding currencies of the G10 currencies and go short the three lowest yielding currencies of the G10. It will exclude the US dollar. The three currencies it goes long will be leveraged by a factor of two.
The general idea behind the concept is that higher yielding currencies tend to outperform lower yielding currencies. Naturally Deutsche Bank has back tested data that makes this index, called the G10 Currency Future Harvest Index, look compelling.
This is an actively managed product, it will rebalance quarterly, compared to the Euro Currency Trust (FXE) and the proposed currency ETFs that will passively capture the Aussie, Mexican Peso, Swissi, Swedish krona, loonie and the British pound.
I think this can be a good idea for investors that want to diversify out of some of their dollar exposure. Like most investment products there is a flaw and this one, while obvious, may not be a huge negative in terms of results but needs to be understood nonetheless.
The index is built on a truism that higher yielding currencies generally do better than lower yielding currencies. Another truism is that currencies tend to do well when interest rates start to go up. This is one of the reasons I have been favorable to Sweden, the Riksbank (Swedish central bank) is in the early stages of a tightening cycle. Ditto the Norges Bank in Norway.
Viewed as an asset class, DBV, if it comes, will do the job of providing exposure which is the important thing. That it will or will not be the single best way to own foreign currency is far less important.
This type of new, for most people, asset class diversification is something I have been writing about for a while. I have been writing that I think it will become more important for US based investors and that there will be more and more products that will allow different ways to access currencies.
To repeat something from earlier this week, currency products should not be thought of as low risk equity investments. They should be thought of as high risk cash investments.
Read more!
Market Angst
This is one ugly chart. Longtime readers will know I have generally been a dollar bear since the start of this site but we have had almost a month of straight down.This is not how markets usually work. I have written twice about some sort of correction that should come, but of course it hasn't.
Even the Icelandic kronur and the Hungarian forint, both tarred by current account deficit issues have gained against the greenback.
I take the severity of the action and the reaction in foreign equity markets to mean that this is a re-pricing as opposed to a normal currency market gyration.
Perhaps this is a vote of no confidence in Big Ben, perhaps this is an expression of inflation worries or something else but too much longer it this type of sharp weakness will be fundamentally negative for our trade partners (if it isn't already).
I think the moves in the kronur and forint (mentioned above) is significant because of how hated they were so recently.
Who knows how serious this will be and maybe the dollar will turn sometime today for no reason at all but this is why you own some of the things I have been writing about all this time. Things are hitting the fan in some magnitude and a properly diversified portfolio owns a couple of things that can go up while most things go down.
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Thursday, May 11, 2006
Interesting Mobius Comment
Mark Mobius made an interesting comment about IPOs in this interview.
Typically more IPOs means more supply. Eventually the supply created overtakes demand and stocks go down.
Mobius is quoted as saying "We've never seen this kind of liquidity before. IPOs like that of the Bank of China are very good for the markets because they absorb the flows of money coming in."
I take this to mean he thinks emerging markets, as a theme, has a long way to go. I'm sure someone will comment that he is talking his book. Perhaps that is true but I think the theme has long term legs. Of course no matter how giddy you might be make sure you don't own more than you can handle.
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Typically more IPOs means more supply. Eventually the supply created overtakes demand and stocks go down.
Mobius is quoted as saying "We've never seen this kind of liquidity before. IPOs like that of the Bank of China are very good for the markets because they absorb the flows of money coming in."
I take this to mean he thinks emerging markets, as a theme, has a long way to go. I'm sure someone will comment that he is talking his book. Perhaps that is true but I think the theme has long term legs. Of course no matter how giddy you might be make sure you don't own more than you can handle.
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U G L Y
The market's got no alibi.
Today's action feels uglier that the minus 1% on the S&P 500 so far. The NYSE advance decline today has 26% up and 69% down and there are similar numbers for the Nasdaq.
Jason Maxwell from TCW Group just pointed out that the S&P 500 is up 5% year to date so its a good year so far. OK but Germany, as measured by iShares Germany (EWG), is up more than 20% YTD.
Like many others I can't get enough adjusted for inflation numbers. As a man who just turned 40, the cost to fill up a gas tank from before I was old enough to drive is very relevant to my thinking (read sarcasm).
That gold is way below where it was adjusted for inflation does not really mean much. The price has doubled in the last few years and I think the trend is more important, for now, than the level, be it real or nominal.
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Today's action feels uglier that the minus 1% on the S&P 500 so far. The NYSE advance decline today has 26% up and 69% down and there are similar numbers for the Nasdaq.
Jason Maxwell from TCW Group just pointed out that the S&P 500 is up 5% year to date so its a good year so far. OK but Germany, as measured by iShares Germany (EWG), is up more than 20% YTD.
Like many others I can't get enough adjusted for inflation numbers. As a man who just turned 40, the cost to fill up a gas tank from before I was old enough to drive is very relevant to my thinking (read sarcasm).
That gold is way below where it was adjusted for inflation does not really mean much. The price has doubled in the last few years and I think the trend is more important, for now, than the level, be it real or nominal.
Read more!
At Your Own Peril?
I got an email yesterday from a reader noting that Telecom New Zealand (NZT) was trading with a $23 handle and he wondered if I thought it was the time to get in.
I wonder if I had just said yes if he would have bought right then. I replied that I had no idea what he should do but that I was worried about two things, more kiwi selling and what appears to be Prime Minister Clark's intention to split the company up. A potential split is a new wrinkle, I'm not sure what the full impact would be and it is the type of thing that could be missed, in fact the emailer missed it.
Had I missed that little nugget, told this stranger to buy and then the stock went down a lot, well then what?
There is a lot of content out there, some of it good and some of it bad. Taking action based on the word of someone else without doing your own heavy lifting is a bad idea. Assuming nothing but good intentions people miss things all the time and I am no exception.
Part of do-it-yourself is, um, doing it yourself.
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I wonder if I had just said yes if he would have bought right then. I replied that I had no idea what he should do but that I was worried about two things, more kiwi selling and what appears to be Prime Minister Clark's intention to split the company up. A potential split is a new wrinkle, I'm not sure what the full impact would be and it is the type of thing that could be missed, in fact the emailer missed it.
Had I missed that little nugget, told this stranger to buy and then the stock went down a lot, well then what?
There is a lot of content out there, some of it good and some of it bad. Taking action based on the word of someone else without doing your own heavy lifting is a bad idea. Assuming nothing but good intentions people miss things all the time and I am no exception.
Part of do-it-yourself is, um, doing it yourself.
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Dismissing Inflation
I am a little concerned about some of the dismissive chatter around inflation. The other day Cody Willard was on the Kudlow show and was dumbfounded when Barry Ritholtz said there are clearly inflationary pressures. Dumbfounded may be unfair but he rejected the notion of inflationary pressures.
I wonder how many folks completely dismiss that the idea that there could be inflation popping up.
This post is not whether there is or is not inflation to worry about. If you look at things like the commodities, the weak dollar and rising rates it makes sense to explore the possibility as they have historical precedent for being inflationary. Whether they are inflationary this time around doesn't have to matter but I think it is unwise to blow this off.
In 1999 people blew off earnings and other metrics of valuation and that had disastrous results. I do not think the consequence for disregarding these inflation warnings will lead to a 2000-like meltdown because I don't think mature equity markets can cut in half twice in a decade but there could be problems of some magnitude.
A lot of media over-emphasizes the positive but the positives are not what will hurt your investment portfolio. I think it is far more productive to try to understand what can hurt your portfolio. I have been bearish all year (and wrong about it of course) but catching the move up. Whistling passed any current or future graveyards is probably a bad idea.
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I wonder how many folks completely dismiss that the idea that there could be inflation popping up.
This post is not whether there is or is not inflation to worry about. If you look at things like the commodities, the weak dollar and rising rates it makes sense to explore the possibility as they have historical precedent for being inflationary. Whether they are inflationary this time around doesn't have to matter but I think it is unwise to blow this off.
In 1999 people blew off earnings and other metrics of valuation and that had disastrous results. I do not think the consequence for disregarding these inflation warnings will lead to a 2000-like meltdown because I don't think mature equity markets can cut in half twice in a decade but there could be problems of some magnitude.
A lot of media over-emphasizes the positive but the positives are not what will hurt your investment portfolio. I think it is far more productive to try to understand what can hurt your portfolio. I have been bearish all year (and wrong about it of course) but catching the move up. Whistling passed any current or future graveyards is probably a bad idea.
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Wednesday, May 10, 2006
Watch Out!
Anyone else concerned about this "78.38 Below" number that CNBC has posted in relation to how far we are from the Dow's all time high?
If they do in fact act as cheerleaders you would think someone there would realize they have an uncanny knack for poor timing.
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If they do in fact act as cheerleaders you would think someone there would realize they have an uncanny knack for poor timing.
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Shock
So the Fed statement finally came out and we don't know anymore than we did ten minutes ago. The Fed might pause in June or it might not.
Nothing is ever permanently resolved. At some point they will be done and then when will they cut rates will be the hot topic.
The initial reaction of stocks down, yields up has given way to stocks where they were and yields up.
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Nothing is ever permanently resolved. At some point they will be done and then when will they cut rates will be the hot topic.
The initial reaction of stocks down, yields up has given way to stocks where they were and yields up.
Read more!
Delving Into DIA
A reader left the following comment on my post yesterday about Dell. I replied on the post but it occurred to me that it might be worth giving the topic its own post.
And the DJI continues towards an all time high despite the performance of MSFT and INTC. Maybe large cap is making a comeback?
My reply was (note the numbers are as of yesterday);
YTD the DOW is up 8%-9% while IWM is up better than 15%.
For the last month the DOW is up a little over 4% and IWM is up a little less than 4%.
The DOW is not my favorite large cap proxy. In the last month UTX is up 13%, MMM and CAT are both up 8%. The performance of those three are probably the difference. And all three have market caps below $100 billion.
So maybe large cap-ish is turning but the threshold for mega cap is usually $100 billion and for now that segment still struggles.
I have probably touched on this before but I find no value in the DOW as a proxy for anything. It only has 30 names (obviously) and the methodology is to weight the components by price. Today, Minnie Mining is the most important stock in the DOW's universe because it has the highest price per share.
If MMM did a two for one split today it would no longer be the heavy weight it is today. That the DOW is near an all time high while the S&P 500 and the Nasdaq both have a long way to go should belie the fact that something is not right with the DOW.
Obviously I am very opinionated about this and I am sure some folks swear by the DOW. You should judge for yourself.
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And the DJI continues towards an all time high despite the performance of MSFT and INTC. Maybe large cap is making a comeback?
My reply was (note the numbers are as of yesterday);
YTD the DOW is up 8%-9% while IWM is up better than 15%.
For the last month the DOW is up a little over 4% and IWM is up a little less than 4%.
The DOW is not my favorite large cap proxy. In the last month UTX is up 13%, MMM and CAT are both up 8%. The performance of those three are probably the difference. And all three have market caps below $100 billion.
So maybe large cap-ish is turning but the threshold for mega cap is usually $100 billion and for now that segment still struggles.
I have probably touched on this before but I find no value in the DOW as a proxy for anything. It only has 30 names (obviously) and the methodology is to weight the components by price. Today, Minnie Mining is the most important stock in the DOW's universe because it has the highest price per share.
If MMM did a two for one split today it would no longer be the heavy weight it is today. That the DOW is near an all time high while the S&P 500 and the Nasdaq both have a long way to go should belie the fact that something is not right with the DOW.
Obviously I am very opinionated about this and I am sure some folks swear by the DOW. You should judge for yourself.
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Welcome to CramerWatch.org | Jim Cramer's Mad Money: Does Jim Cramer offer sound stock advice?
Welcome to CramerWatch.org | Jim Cramer's Mad Money: Does Jim Cramer offer sound stock advice?
Everyone has an opinion about Jim. I first found out about this site from a link on Adam Warner's site. I also got an email from one of the keepers of the site.
It is funny stuff. Depending on your opinion if Jim you may find funny or view it as unintentional comedy.
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Everyone has an opinion about Jim. I first found out about this site from a link on Adam Warner's site. I also got an email from one of the keepers of the site.
It is funny stuff. Depending on your opinion if Jim you may find funny or view it as unintentional comedy.
Read more!
Back To Currency Products
ETFInvestor links to a good but brief article by James Grant about a few of the currency products that are currently available including the two principle protected notes from Citi, CAQ and CZJ.
I have been public about buying CAQ personally but I did not buy for clients because of potential quirks inherent in the product.
I think I bought CAQ about six months ago, I know I paid $9.35 per share. Right now CAQ is at $9.70. That is a move of 3.75%, so big deal right? Who cares?
The point of this post is that although currency may become a more important tool to incorporate into a diversified portfolio wild success will mean small returns when compared to equities. I bought CAQ as a cash proxy not as a stock-type investment. I would be thrilled if the cash proxy extrapolates out to 7% for a full year.
I have written about currency products before and when the new currency ETFs come out I will write about them too. If you plan to tread into these waters you need to have the right expectations. These are more like cash substitutes not equities.
The Rydex Weak Dollar Fund (RYWBX) is leveraged to double the inverse of moves made by the dollar. With all of the attention paid to the dollar's drop the fund is only up 12% YTD. If you compare that to a gold stock or an energy stock YTD it looks lousy but that is the wrong comparison.
In terms of stocks/bonds/cash these products are high risk in the cash arena not low risk in the equity arena.
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I have been public about buying CAQ personally but I did not buy for clients because of potential quirks inherent in the product.
I think I bought CAQ about six months ago, I know I paid $9.35 per share. Right now CAQ is at $9.70. That is a move of 3.75%, so big deal right? Who cares?
The point of this post is that although currency may become a more important tool to incorporate into a diversified portfolio wild success will mean small returns when compared to equities. I bought CAQ as a cash proxy not as a stock-type investment. I would be thrilled if the cash proxy extrapolates out to 7% for a full year.
I have written about currency products before and when the new currency ETFs come out I will write about them too. If you plan to tread into these waters you need to have the right expectations. These are more like cash substitutes not equities.
The Rydex Weak Dollar Fund (RYWBX) is leveraged to double the inverse of moves made by the dollar. With all of the attention paid to the dollar's drop the fund is only up 12% YTD. If you compare that to a gold stock or an energy stock YTD it looks lousy but that is the wrong comparison.
In terms of stocks/bonds/cash these products are high risk in the cash arena not low risk in the equity arena.
Read more!
Preferred Stock ETF?
Market Participant has a post up at ETF Investor about the need for a preferred stock ETF. I'm going to disagree for a couple of reasons.
The first reason is about investment merit and characteristics. ETFs help with single stock risk. The risk taken by owning a single-issue investment grade preferred stock is, reasonably speaking, quite low. The driver of volatility in a preferred stock is the maturity date and/or the call dates. This is easily controlled.
What about Enron and Worldcom like fraud? Well since those two how many fraudulent blowups have there been? Very rarely in history do investment grade companies go away due to fraud, it is statistically insignificant.
The other obstacle, more trading oriented, is liquidity of most preferred stock. The manager of a CEF can factor in liquidity and take time entering a position or get shares of a new issue if need be. An ETF provider needs to be able to meet creation-unit demand. To create shares of the ETF, the provider needs to either buy shares of the component holdings or buy futures on the way to buying the shares.
There are no futures or options for preferred stock. Buying a bunch of preferred stock in a reasonably short time period would be very difficult if not impossible. Most of the time there are just a few hundred shares offered for sale.
I mentioned CEFs up above. Look at the chart action of some of the preferred stock CEFs and you will see the most of the funds are more volatile than the underlying holdings. This is because the market price can swing wildly, in relation to NAV. An individual issue has its par value it has to go back to a CEF does not.
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The first reason is about investment merit and characteristics. ETFs help with single stock risk. The risk taken by owning a single-issue investment grade preferred stock is, reasonably speaking, quite low. The driver of volatility in a preferred stock is the maturity date and/or the call dates. This is easily controlled.
What about Enron and Worldcom like fraud? Well since those two how many fraudulent blowups have there been? Very rarely in history do investment grade companies go away due to fraud, it is statistically insignificant.
The other obstacle, more trading oriented, is liquidity of most preferred stock. The manager of a CEF can factor in liquidity and take time entering a position or get shares of a new issue if need be. An ETF provider needs to be able to meet creation-unit demand. To create shares of the ETF, the provider needs to either buy shares of the component holdings or buy futures on the way to buying the shares.
There are no futures or options for preferred stock. Buying a bunch of preferred stock in a reasonably short time period would be very difficult if not impossible. Most of the time there are just a few hundred shares offered for sale.
I mentioned CEFs up above. Look at the chart action of some of the preferred stock CEFs and you will see the most of the funds are more volatile than the underlying holdings. This is because the market price can swing wildly, in relation to NAV. An individual issue has its par value it has to go back to a CEF does not.
Read more!
Tuesday, May 09, 2006
Misc.
Top 10 signs of an inflating ethanol bubble
The above link is funny top ten from Aaron Pressman, deja-vu all over again.
The tax news reported on CNBC gave a huge lift to the market, it looks like the S&P 500 rallied by almost a point.
Read more!
The above link is funny top ten from Aaron Pressman, deja-vu all over again.
The tax news reported on CNBC gave a huge lift to the market, it looks like the S&P 500 rallied by almost a point.
Read more!
Yet Another Blow To Big Tech
Dell is puking down today based on news last night after the close. I used to own this stock for clients. I doubt my reasons for owning were unique in any way.
I sold half the position last October at $32.07 as part of a small get defensive trade I made. I sold the balance in January at $29.96. The second trade was me throwing in the towel.
The stock had gone down a lot before I sold but it got to the point where I knew I was wrong about the company's ability to swim upstream against the other big tech companies.
It is human nature to struggle with taking losses. I have trained myself to focus on what I think will happen to a stock not whether I am up or down. Up or down is more about where a stock has been which is precisely the wrong thing to do, strategically.
This all ties into the idea of being wrong. You will get certain picks wrong. There is no avoiding being wrong. A balanced portfolio should minimize the consequence of when you are wrong. I turned out to be wrong for being in the name but was right (for now) in selling when I did.
If you own stocks that you think you should give up on, you are probably right. One word of caution, if Dell's price action was not worse than the rest of the sector it might have been a different story. If a sector is down 20% (that is rare of course) and a stock you own within that sector is down the same 20% I'm not so sure it is a sell. No matter how poorly a sector does I am not going to be zero weight. Hopefully I would already be underweight a sector down that much before it dropped that much.
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Dollar
This chart of the dollar captures the trend of the last couple of weeks very well. As I read the action it appears as though the dollar has no where to go but down. Ahem.
If you have been lucky enough to have a lot of foreign exposure this year you have probably added a lot of alpha to your portfolio. It is possible any outperformance has accelerated in the last two weeks.
I wrote a similar post recently, but the dollar can't go in only one direction. I generally expect a weaker dollar but it makes sense to think it has to correct a little bit before anything else.
I am writing this just as the Fed is due to announce a move to 5%. As seems to always be the case the market is waiting on pins and needles for Maria to decipher what their statement will mean.
Some sort of dollar rally would not come as a shock even if it does not last a long time. Another factor that could turn the tide, short-term, is that anecdotally there seems to be no positive sentiment on the dollar anywhere. In the past I have noticed everyone ganging up on the same side of the trade and it usually turns the other way shortly there after.
This post is not meant to urge anyone to undo any themes they believe in but to create some expectation that some things that have been working very well for the last couple of months may have a bumpy few weeks.
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Monday, May 08, 2006
Reader Question
OK so alot of people are bearish but what is the catalyst to reverse a 3 year bull market? Earnings has been good so far with 70% of the S&P beating. Any thoughts?
Bear markets usually start quietly with no real catalyst with regard to time. We all know the Nasdaq peaked in in March 2000 but why March? Why not six months later or six months earlier? The peak happened for no real reason, with regard to time. Bottoms get put in for no real reason. PE ratios can appear cheap or appear expensive for long periods of time and have not offered much predictive value for determining major turns.
This is why I like the 200DMA. It is one of several valid indicators for signaling a problem with demand for stocks. When demand for stocks is good you should own stocks. When demand is bad, you should not own stocks.
Because demand can appear bad but turn on a dime I would never advocate zero stocks but you get the idea. Regardless of my sentiment at any time, there is either a problem with demand or there is not. This is a simplistic view but I think simple is better.
For now there is not a problem with demand. There is the threat of a problem but no problem for now.
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Bear markets usually start quietly with no real catalyst with regard to time. We all know the Nasdaq peaked in in March 2000 but why March? Why not six months later or six months earlier? The peak happened for no real reason, with regard to time. Bottoms get put in for no real reason. PE ratios can appear cheap or appear expensive for long periods of time and have not offered much predictive value for determining major turns.
This is why I like the 200DMA. It is one of several valid indicators for signaling a problem with demand for stocks. When demand for stocks is good you should own stocks. When demand is bad, you should not own stocks.
Because demand can appear bad but turn on a dime I would never advocate zero stocks but you get the idea. Regardless of my sentiment at any time, there is either a problem with demand or there is not. This is a simplistic view but I think simple is better.
For now there is not a problem with demand. There is the threat of a problem but no problem for now.
Read more!
Good Article
I found a good article from BusinessWeek Europe via Yahoo Finance about ETFs and the move to narrower themes in the product lines offered by the various providers.
When I put the post up about the new iShares funds the other day, I had some comments left about what I had in mind about useful.
A lot of the new funds are different versions of ETFs that already exist. There are other homebuilder ETFs, another insurance ETF, another aerospace ETF and so on. The new ones being created might be better than the ones that already exist but a lot of the me too products will not have much differentiation.
This is not a negative thing. I have said before that in bringing useful new products to the market there will be some that aren't so hot.
The new gold miner's ETF in the works from Van Eck is a concept that makes sense. I imagine there will be one or two other mining ETFs that will come along. One may be better than the others, assuming more than one does come. The idea of splitting gold exposure between GLD and a miner ETF is very appealing to me.
The first two bio-tech ETFs had big flaws. BBH is hugely overweight two stocks and IBB (client holding) is only Nasdaq. The third entrant, from PowerShares, had far fewer flaws. There is a new one from StateStreet that I have not studied yet that could be better or could be worse.
On March 31 I poked a little fun at the Ferghana-Wellspring proposed line up of narrow based health-related ETFs but they could turn out to be the best choice for bio-tech.
The point here is that there will be a lot of new product and part of your job of managing your portfolio (if you use or have any interest in using ETFs) is to stay reasonably current on what is happening with new ETFs.
Read more!
When I put the post up about the new iShares funds the other day, I had some comments left about what I had in mind about useful.
A lot of the new funds are different versions of ETFs that already exist. There are other homebuilder ETFs, another insurance ETF, another aerospace ETF and so on. The new ones being created might be better than the ones that already exist but a lot of the me too products will not have much differentiation.
This is not a negative thing. I have said before that in bringing useful new products to the market there will be some that aren't so hot.
The new gold miner's ETF in the works from Van Eck is a concept that makes sense. I imagine there will be one or two other mining ETFs that will come along. One may be better than the others, assuming more than one does come. The idea of splitting gold exposure between GLD and a miner ETF is very appealing to me.
The first two bio-tech ETFs had big flaws. BBH is hugely overweight two stocks and IBB (client holding) is only Nasdaq. The third entrant, from PowerShares, had far fewer flaws. There is a new one from StateStreet that I have not studied yet that could be better or could be worse.
On March 31 I poked a little fun at the Ferghana-Wellspring proposed line up of narrow based health-related ETFs but they could turn out to be the best choice for bio-tech.
The point here is that there will be a lot of new product and part of your job of managing your portfolio (if you use or have any interest in using ETFs) is to stay reasonably current on what is happening with new ETFs.
Read more!
Sunday, May 07, 2006
Worthy Cause Update
Last fall I wrote up a post for this site about the goings on with our fire department's quest for a new fire truck. I took this as a personal mission or goal to try to bring this to fruition. Like most small organizations on a shoestring budget we have our strengths and weaknesses. We overcame our weaknesses to make this happen.
As you can see from the pictures the truck arrived. It came today, that's me by the truck in both photos.
The process of financing the truck was a hassle. The first loan company tried to put us into the wrong loan product for the type of department we are. I had to do a last minute loan through the fire department's bank, Chase. At one point it was looking like my wife and I might have to lend the final $20,000 to buy the truck but Chase came through very quickly.
We are have our annual meeting (which is a big event) over Memorial Day weekend. I plan to grovel in front of the community to try to get people to donate enough to pay off the loan.
You can probably guess what is coming next here. I am groveling in front of the audience that reads this blog for donations toward the loan balance.
Anyone so inclined can Paypal the Fire Dept through the Walker Fire website (scroll down once you get there) or mail a check to;
Walker Fire Protection Association
5881 Walker Road
Prescott, AZ 86303
On a personal note this is a big deal to me that we were able to set a big goal like this and actually make it happen. Thank you for taking time to read this and thank you to the many readers who have already donated to this effort.
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The Big Picture For The Week Of May 7, 2006
I had an interesting thought that may border on a theory or more correctly tie into a theory I espoused a long time a go.
Starting from the beginning, I have thought that the US may be in for a period, perhaps a very long period, of shallower economic cycles. This, if it pans out, would be a function of an ever-maturing economy.
I view the some of the bigger economies in Europe to be more mature than the US. Following that thought, economic cycles in Europe tend to generally be quite shallow.
Shallower economic cycles could lead to more muted stock market cycles.
That is the background for this post.
Larry Kudlow continually tells his audience how great things are, he marvels at the economy and the stock market on a regular basis. Is Larry actually capturing the sentiment of the US investing public correctly? That is tough to say.
For a little perspective, the above chart shows that year to date the S&P 500 is up 5%. That is a nice move, no doubt, but the "greatest story never told" or however Larry refers to it? If Larry is accurately capturing investor glee then I have to wonder about muted domestic returns. If plus 5% incites glee it may be a tough hill to climb to have a truly great year.
While the US is up 5% the rest of the world, as measured but EFA, is up more than 15% so why are we so excited, if indeed we are excited?
This has nothing to do with being bearish or bullish. The question is if investors' expectations have diminished in such a way that a 5% move in five months could incite euphoria.
Fortunately for clients but unfortunately for my theory the returns in western Europe have been far from muted.
Read more!
Starting from the beginning, I have thought that the US may be in for a period, perhaps a very long period, of shallower economic cycles. This, if it pans out, would be a function of an ever-maturing economy.
I view the some of the bigger economies in Europe to be more mature than the US. Following that thought, economic cycles in Europe tend to generally be quite shallow.
Shallower economic cycles could lead to more muted stock market cycles.
That is the background for this post.
Larry Kudlow continually tells his audience how great things are, he marvels at the economy and the stock market on a regular basis. Is Larry actually capturing the sentiment of the US investing public correctly? That is tough to say.
For a little perspective, the above chart shows that year to date the S&P 500 is up 5%. That is a nice move, no doubt, but the "greatest story never told" or however Larry refers to it? If Larry is accurately capturing investor glee then I have to wonder about muted domestic returns. If plus 5% incites glee it may be a tough hill to climb to have a truly great year.
While the US is up 5% the rest of the world, as measured but EFA, is up more than 15% so why are we so excited, if indeed we are excited?
This has nothing to do with being bearish or bullish. The question is if investors' expectations have diminished in such a way that a 5% move in five months could incite euphoria.
Fortunately for clients but unfortunately for my theory the returns in western Europe have been far from muted.
Read more!
Saturday, May 06, 2006
Whither The Reverse Mortgage?
Barron's Online - No Laughing Matter
I'm not sure if Barron's is free like the WSJ was but this article is about Social Security and Medicare running out of money. I doubt there is much there you haven't read.
It did touch on one thing that has been in the back of my mind for while which is life expectancies.
Medical advances are coming at an accelerating rate. How much medical innovation has there been in the last 25 years? Compare that to how much there was in the 25 years prior to that. The way these things tend to work it is possible that the advances over the next 25 years will be greater than the rest of all previous history combined (not sure if that reads well or not).
The thought I had about this is not something I have seen anywhere else and that is reverse mortgages. If a 70 year old person takes out a reverse mortgage and the bank assumes a 15 year life expectancy but that person lives another 50 years the bank has a big problem.
I do not know how realistic living to 120 is and it does not really matter. I do buy into people living much longer regardless of the number. Either reverse mortgages will go away or banks that are too heavy in them will face serious problems.
I suppose another possibility could be that you have to 90 years old to get one?
Read more!
I'm not sure if Barron's is free like the WSJ was but this article is about Social Security and Medicare running out of money. I doubt there is much there you haven't read.
It did touch on one thing that has been in the back of my mind for while which is life expectancies.
Medical advances are coming at an accelerating rate. How much medical innovation has there been in the last 25 years? Compare that to how much there was in the 25 years prior to that. The way these things tend to work it is possible that the advances over the next 25 years will be greater than the rest of all previous history combined (not sure if that reads well or not).
The thought I had about this is not something I have seen anywhere else and that is reverse mortgages. If a 70 year old person takes out a reverse mortgage and the bank assumes a 15 year life expectancy but that person lives another 50 years the bank has a big problem.
I do not know how realistic living to 120 is and it does not really matter. I do buy into people living much longer regardless of the number. Either reverse mortgages will go away or banks that are too heavy in them will face serious problems.
I suppose another possibility could be that you have to 90 years old to get one?
Read more!
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